Italy, a country that has seen 66 governments since the second world war, is wearily accustomed to political uncertainty.

Yet the instability caused by the resignation of prime minister Giuseppe Conte this week comes at an unusually delicate moment. Not only is Italy battling the Covid-19 pandemic and a severe recession, but it is also in the middle of drawing up ambitious plans to relaunch the country’s economy by spending €200bn in grants and loans from the EU’s recovery fund.

The stakes are high. Domestically Italy is seeking to repair an economy that even before the current crisis had never fully recovered from the post-2008 recession. Its success or failure in making use of the largest single share of the EU’s €750bn recovery fund is also likely to define what has been hailed as a pivotal moment in pan-European solidarity. But Rome risks falling well behind other countries, including Spain, in drawing up recovery plans because of the political turmoil it is currently experiencing. 

“We are in a critical moment,” said Valentina Meliciani, director of Luiss University School of European Political Economy. “Whether a stable government can now be created will define how the EU money is going to be spent. This is a big opportunity for Italy, but the price of failure is enormous and the consequences of that would go beyond our country”.

On Wednesday Italy’s political parties began a round of consultations at the request of President Sergio Mattarella to see if a new majority government could be pieced together from the current parliament. Mr Conte is expected to attempt to forge a new coalition to allow him to be reappointed as prime minister, with his previous allies having declared that they want to stick with him. 

If Mr Conte is unable to do this, Mr Mattarella will then see if a new coalition can be formed without him, or possibly even a government of national unity that involves parties from the country’s rightwing opposition. 

The current political crisis began with disagreement over how the EU recovery money would be spent. Former prime minister Matteo Renzi removed his small Italia Viva party from Mr Conte’s coalition after accusing him of mismanaging the spending plans, stripping it of its majority in the Italian senate and eventually forcing Mr Conte to step down this week.

Giuseppe Conte resigned as PM this week © Riccardo Antimiani/EPA-EFE/Shutterstock

Mr Renzi, however, has not been the government’s only critic on the issue. This week Carlo Bonomi, president of the Italian business association Confindustria, raised concerns over the lack of detail in the current proposals and the absence of structural reforms that the EU will want to see as evidence the money is being spent effectively.

“In a political situation like the one we are experiencing [it] is difficult to see how we can have a government that has the strength to make decisive reforms,” Mr Bonomi said. “The EU expects from this country the major structural reforms that have not been done. We must not waste time faced with a historic opportunity to make this country more modern”.

As Mr Conte now attempts to build a new government discussions are already under way between the European Commission and member states over draft plans, with the goal of submitting final proposals by April 30. 

The draft plan Rome published shortly before Mr Renzi pulled his ministers out of the Conte government lacked the full detail on reforms and delivery milestones that the final version will require. 

The commission is expecting Italy to come forward not only with investment proposals, but also suggested reforms — coupled with a timetable and milestones — in politically sensitive areas. Brussels has in its regular rounds of economic surveillance on Italy recommended reforms to pensions and the country’s judicial system, as well as efforts to boost competition. 

Italy is well used to political turmoil but the latest crisis comes at a pivotal moment in pan-European solidarity © Andrea Ronchini/NurPhoto via Getty Images

Once final plans are submitted, the commission will have two months to do its formal assessment of the proposals before agreeing them. Member states then have an additional month to give their own sign-off. In practical terms this means officials are not expecting the first disbursements of recovery fund cash to come before June.

Lorenzo Codogno, a former chief economist at the Italian treasury, said that Italy is under pressure to show that it will spend the money effectively or risk being held up as an example of the failure of the project by more sceptical northern European countries.

“Many countries that were on the sceptical side remain sceptical. If it is a failure then at some point they will say ‘I told you so’,” he said. 

The principal risk, Mr Codogno argued, is that sufficient reforms to areas such as the Italian public administration and judicial systems were not made alongside spending the European money, meaning its long-term impact on revitalising the Italian economy would be diluted.

“Politicians get excited when they have money to spend, but that is very dangerous,” he said. “There is a risk of a substantial misallocation of resources”.

Ms Meliciani, however, said that the current political crisis may serve to focus minds in Rome. If, she argued, the situation can be resolved by finding a stronger government that has enough parliamentary support to push through reforms, then the greater the likelihood of the recovery money being well spent.

“If we can form a stable government, then it will be good news for spending the money in the right way,” she said. “This crisis could also be an opportunity.”