Is the promise of EU recovery funds enough to cut through political crisis and spur necessary reforms?

Italy—and much of Europe—is still reeling from the collapse of Mario Draghi’s national unity government, which came in late July despite nearly-unprecedented displays of public support for the former central banker. Traders dumped Italian bonds following Draghi’s resignation, and instability continues to prevail ahead of September 25 elections that are threatening to usher far-right parties into power.

In the first week of August, Moody’s lowered Italy’s sovereign rating outlook to negative, citing the risk its domestic political uncertainty poses to necessary structural reforms, including those at the heart of Italy’s National Recovery and Resilience Plan—the package which unlocked a whopping €191.5 billion from the EU’s coronavirus recovery fund, the largest allotment to any single member state.

It’s unclear whether Rome can keep pace with its ambitious reform agenda following the latest government crisis. Italian President Sergio Mattarella warned as he dissolved parliament that it was a last-resort option, particularly “when the parliament has so many important tasks to complete in the interests of the country” and “pivotal deadlines” to meet.

Specifically, Italy needs to hit reform milestones by December 31st in order to unlock a second tranche of funding, worth roughly 1% of its GDP—something which economists fear may be impossible without Draghi’s stewardship. While some pundits are dreaming of a hung parliament forcing Mattarella to again call on “Super Mario” to save Italy as he once saved the euro, others have cautioned that Draghi, fundamentally a technocrat with little appetite for dirty politics, “isn’t coming to Italy’s rescue anymore”.

What’s certain is that Draghi is making the most of his remaining weeks as caretaker PM and doing his best to position Italy in the best possible stead to receive its next instalment of recovery funds, notably by rolling out sweeping reforms to the country’s justice system in early August. The reforms, which include a provision to scrap trials past their statute of limitations, are intended to streamline Italy’s judiciary, which the European Commission singled out this year as one of the least efficient in the EU, and are crucial given that the EC conditioned Italy’s recovery funds on shaving between 25% and 40% off of the length of trials.

Will the promise of substantial EU recovery funds be enough to incite other EU member states with fragile coalitions, such as Slovakia and Bulgaria, to push through long-overdue reforms, or will their domestic political troubles imperil their access to the recovery funding they sorely need?

Slovakia veering in the wrong direction

The situation is not encouraging in Slovakia, where the out-of-favour coalition government is lurching unsteadily from one crisis to another and politicians from the ruling OLaNO party are resorting to increasingly desperate gambits to avoid early elections. Slovakian PM Eduard Heger is stubbornly resisting demands to sack Finance Minister and OLaNO party leader Igor Matovic, though pundits have warned that Heger’s loyalty to Matovic may carry a heavy price. For one thing, Matovic is deeply unpopular, distrusted by a staggering 88% of Slovaks.

Matovic also represents a more immediate threat to the ruling coalition’s survival, and one of its four parties has threatened to leave the government if Matovic is still in post at the end of August. Heger has indicated that he would continue with a minority government rather than call elections, but analysts are sceptical that an even-weaker coalition would be able to enact the meaningful reforms needed to unlock the full €6.3 billion in EU recovery grants which Bratislava needs to modernise its economy.

To make matters worse, not only are Slovak lawmakers evincing little enthusiasm for the judicial reforms which are essential to its national recovery and resilience plan, the Slovak judiciary is apparently being co-opted into a tool to help OLaNO stay in power, with the EU pointing to allegations of politically-motivated corruption prosecutions in its latest rule of law report. Already the third EU country from the bottom in terms of perceived judicial independence, Slovakia has seen the reputation of its judiciary plummet still further following a series of cases against prominent opposition figures, often based on contradictory evidence elicited by controversial methods—and often announced on social media by Matovic, casting further doubt on the legitimacy of these prosecutions. Slovakia urgently needs to restore the reputation of its judiciary—but genuine reforms seem unlikelier than ever as Heger and Matovic double down, putting billions of euros of recovery funds at risk.

With caretaker government faltering, Bulgaria must bank on elections.

Questions have been raised about Bulgaria’s ability to keep pace with the reforms needed to unlock its own €6.3 billion in EU recovery funds, after the government headed by reform-minded PM Kiril Petkov fell in late June. The caretaker government sworn in at the beginning of August seems determined to roll back the “European awakening” that Bulgaria experienced under Petkov’s leadership, sacking a number of top officials, contemplating a new long-term contract with Gazprom despite the conflict in Ukraine, and taking steps to block Bulgaria’s nearly-completed gas interconnector with Greece.

The rolling back of Petkov’s reforms has sparked protests in Sofia from Bulgarians who justifiably fear that the caretaker government is risking their EU perspective, with momentum on important reforms stalled. Like in Slovakia, Bulgaria’s plans to reform its judiciary—perceived as only marginally more independent than Slovakia’s—are at risk. Analysts have cautioned that, following the fall of Petkov’s government, the Supreme Judicial Council, considered to be heavily politicised and loyal to strongman former PM Boyko Borisov, is likely to extend its term until at least next year.

Unlike in Bratislava, however, there is a glimmer of hope that the wheels of reform can be kicked back into motion in Sofia—after Bulgaria’s Socialist Party’s third failure to form a government, President Rumen Radev was forced into calling October 2 snap polls. Like in Italy, the most likely outcome of the upcoming elections is another fragmented legislature which will struggle to carry out necessary reforms—unless voters are sufficiently motivated by the need to secure Bulgaria’s recovery funds to return another pro-European majority.

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EUToday Correspondents

EUToday Correspondents

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