Are EU Policies Effective to Tackle the Covid-19 Crisis? The Case of Italy

Abstract

In response to the economic crisis unleashed by the Covid-19 pandemic, the EU authorities have launched extraordinary fiscal and monetary measures in support of member states. The impact of these measures is of great significance for Italy, the EU third-largest economy, which as a result of the pandemic has suffered a dramatic decline in GDP, and a further rise in the government debt to GDP ratio. Building on a stock-flow consistent, structural macro-econometric model, this paper shows that the currently planned EU measures are insufficient to boost the recovery of the Italian economy, and to ensure the sustainability of its government debt. The paper also assesses two potential alternative policies. A fiscal consolidation (i.e. austerity) policy would exacerbate the decline in GDP and further deteriorate the government debt to GDP ratio. By contrast, a money-financed fiscal stimulus policy could lead the Italian economy on a path of sustainable growth, with positive outcomes for employment and government finances.

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