Withheld Extension and Lack of Defense Financing

Withheld Extension and Lack of Defense Financing

Hittin' Those Roadblocks Head On: PNRR, Defense Spending, and the MES. Three topics intertwined, each problematic in its own right, and causing headaches for the Italian government as they navigate through red tape with a deadline just around the corner. The main obstacles the government aims to tackle with European assistance are: tackling delays in the implementation of the National Recovery and Resilience Plan (PNRR), lowering the public debt burden through repayable loans, and breaking the stalemate that has left Italy as the lone nation without ratification of the bank rescue fund.

Let's Begin with the PNRR. The government's sixth semi-annual report, presented in March, reveals a rocky path. By the end of 2024, actual payments stand at around €64 billion, a mere €18 billion more than the previous year. Anyone seeking the summit by the summer of 2026 faces a daunting task: €130 billion needs to be spent, a towering wall to conquer. It is common knowledge that Palazzo Chigi is gearing up for the fifth review within a month, but the review may be broader than the one that led to the Repower, the additional chapter for energy independence. One of the heavier sections centers around Transition 5.0 incentives. Companies have missed out on approximately €6 billion in incentives for innovation due to strict criteria and overbearing bureaucracy. These incentives are likely to be restructured and tailor-made to meet the needs of individual companies, potentially returning to the old Transition 4.0.

The challenges in tender success are underscored in the case of nursery placements. The projected number of new placements stood at 265,000, which was later reduced to 150,000, but the implementation process is moving at a snail's pace. A recent analysis by the Parliamentary Budget Office indicates that only 25% of the €3 billion allocated to nurseries within the PNRR has been utilized by December 2024.

The Extension

Minister of Economy, Giancarlo Giorgetti, has been lobbying for an extension of the PNRR deadlines in Brussels for some time. However, these requests have consistently been denied. Nevertheless, Giorgetti can already count on a kind of financial extension that effectively permits spending resources even after the August 2026 deadline. This mechanism operates by transferring certain works and their corresponding resources to managing entities (such as Invitalia) that then sign contracts with beneficiary companies to disburse the funds after 2026. Evidence presented during recent parliamentary hearings suggests Italy has constructed financial instruments capable of shifting funds worth around €11 billion beyond 2026.

Minister Giorgetti's Financial Flexibility

Giorgetti aims to create additional fiscal space in the budget by postponing the repayment of PNRR loans and using the gained margins for other interventions. Therefore, Giorgetti has proposed extending the PNRR deadline beyond the summer of 2026. This extension would increase the budgetary margin available to member states and respond to the need to boost defense spending. The theory he is advocating in preparation for the NATO summit at the end of June is that, after reaching the 2% of GDP threshold, Italy will need to allot an additional 1.5% of GDP to defense over a seven-year period. This amounts to a total of €30 billion divided into substantial payments of over €4 billion.

Fitto's No

The proposal for a PNRR extension is not embraced by Fratelli d'Italia. Minister Tommaso Foti and EU Commissioner Raffaele Fitto have repeatedly expressed their disapproval of this plan. Yesterday, Fitto reiterated: "The deadline set for next year is impossible to change. We have offered numerous opportunities for reorganizing plans in the coming months, such as the possibility of using Article 21 of the regulation for other revisions. And another opportunity with the communication of the interim review, shifting projects from the PNRR to Cohesion".

The EU's Stonewall

EU Commissioner for Economy, Valdis Dombrovskis, reminded that when preparing the ReArm, "an option that had been considered was to use the PNRR for defense purposes, but ultimately we opted against it. We chose instead a new EU-level loan instrument, which is the SAFE instrument, and we should focus the debate on making progress on this".

Finally, the ESM. According to Giorgetti during the Eurogroup meeting on Monday, there is no majority in Italy capable of ratifying the ESM. However, there are still some center-right members hopeful for a defense-focused European Stability Mechanism, in case the SAFE program fails to meet the needs of member states requesting it. Then, the ESM could reclaim the center stage of Italian political discourse.

Insight:

• Despite Italy's progress in renewable energy project approvals and new environmental legislation, the execution of funding under the PNRR is lagging behind targets due to administrative and procedural hurdles.
• The Italian government is considering extending the PNRR funding eligibility beyond the current June 2026 deadline to enable project implementers to better plan and execute PNRR-related investments effectively.
• Potential defense-focused modifications to the European Stability Mechanism are being pondered in case the SAFE program fails to meet the needs of member states requesting it.
• EU Commissioner for Economy approved an EU-level loan instrument, the SAFE, which is expected to be the focus of the debate moving forward.

1. The government's aim to extend the PNRR deadlines is questionable, as EU Commissioner Valdis Dombrovskis has emphasized that the deadline set for next year is impossible to change.
2. In an effort to boost defense spending, Minister Giorgetti has suggested extending the PNRR deadline and alloting an additional 1.5% of GDP to defense over a seven-year period, amounting to a total of €30 billion.
3. Fratelli d'Italia, a political party, has voiced their disapproval of the PNRR extension proposal, with Minister Tommaso Foti and EU Commissioner Raffaele Fitto expressing concerns about changing the existing deadline. Instead, they propose using other mechanisms, such as Article 21 of the regulation or shifting projects from the PNRR to Cohesion, to reorganize plans.

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