Please click here to download the new report, “Italian regions’ autonomy plans weigh on the fiscal framework’s predictability”

A devolution plan put forward by three of Italy’s wealthiest ‘ordinary status’ northern regions – Emilia-Romagna, Lombardia and Veneto – would hand each of them greater responsibilities and related spending powers over a wide range of policy areas currently held by the central government, Scope Ratings noted in a report out today.

Depending on the final outcome of devolution talks, this could result in wider credit-risk differentiation between Italian regions; there could also be implications on the sovereign rating of Italy (BBB+/Stable).

Sizeable fiscal flows across Italian regions coupled with stringent national fiscal rules have cushioned against significant regional economic disparities between North and South and prevented significant fiscal imbalances at the regional level. But if the plans are successful, they will substantially increase the level of asymmetry in Italian inter-governmental relations and weigh on the predictability and sustainability of national public finances.

“There are three main sources of risk,” said Jakob Suwalski, associate director in the Public Finance ratings team of Scope and co-author of today’s report. “These risks are, namely, an inefficient allocation of responsibilities between central and regional governments; a failure to balance the additional spending powers of wealthy regions with resources redistributed equally across the whole country; and, lastly, weakened oversight by the central government on regional finances.”

The devolution plan is being presented under a constitutional provision called regionalismo differenziato, which to date has never been used. There are concerns about the political feasibility of further devolution, however, in light of its potential consequences on the resilience of the regional financing framework alongside diverging political interests within the governing coalition.

“The same reasons that are pushing regions, especially wealthy regions, towards greater autonomy – tough national fiscal rules and a heavy redistribution of resources from North to South – will also make the process of greater autonomy politically difficult to realise. More autonomy to wealthy northern regions could mean fewer resources for weaker regions and a general loss of control by the central government over national finances,” said Giulia Branz, associate analyst in the Public Finance ratings team of Scope and co-author of today’s report.

The process is at an advanced stage but has reached a standstill; much will depend going forward on further cross-party negotiations. The upcoming European elections are likely to tip the balance, determining not just the balance of power between Italy’s two governing parties, but also within Lega itself. In modern times, Lega faces internal conflicts as the party now represents not only the northern regions – its traditional stronghold – but also southern regions, where the party has made significant electoral gains.

Contributing Writer: Keith Mullin: k.mullin@scopegroup.com