1 Balancing an Inverted Pendulum: Basic Data and Facts

Italy with its population of 60,317,000 (as of 01 January 2020; Istat 2020a) and its territory of 302,068 km2 is highly diverse, with a persistent North–South divide. The territory is one of the key features that reveals such a diversity with some of the twenty regions being vast and densely populated, others being small and sparsely populated. This comes with stronger or weaker regional economies, and with varying fiscal capacities from one subnational entity to another (i.e. regions, provinces, metropolitan cities, and municipalities). Such a diversity poses manifold and differentiated challenges linked to the functioning of mechanisms that must uphold efficient socio-institutional structures and guarantee high-quality public services throughout the entire country.

Italy’s envisaged fiscal federalism and its regime of financial relations are also challenged by ongoing reforms in the local government system. In recent years, the territorial administrative structure has undergone numerous changes, not only in terms of the number of municipalities, but also in terms of the organization of second level local entities. Taking reforms at the national and regional level into account, as of 01 January 2020 (Istat 2020b), Italy consists of the following divisions:

  • 20 regions (fifteen ordinary and five special ones, with varying degrees of autonomy from one to another),

  • 7904 municipalities,

  • 14 metropolitan cities (ranked by population size in decreasing order they are: Rome, Milan, Naples, Turin, Palermo, Bari, Catania, Florence, Bologna, Genoa, Venice, Messina, Reggio Calabria, Cagliari),

  • 83 provinces,

  • 6 free consortia of municipalities,

  • 4 non-administrative units (corresponding to the former provinces of the Friuli-Venezia Giulia region).

Several forms of intermunicipal cooperation complete Italy’s administrative territorial organization.

In Italy, multiple actors with partially overlapping responsibilities contribute to a varying degree to the system of fiscal federalism and financial relations, with specificities from North to South and from East to West, and with central authorities as the ultimate authority deciding the main rules of the game. By and large, Italy’s subnational entities are recognized only with limited taxing powers, and such powers are linked to sources that have little relevance as far as the revenue is concerned. Conversely, they are vested with relevant administrative powers, and this gives rise to a large vertical fiscal gap. Therefore, inter-regional disparities in fiscal capacities are reduced through equalization transfers in order to ensure “the basic level of benefits relating to civil and social entitlements” throughout the entire country [art. 117 par. 2 lit. m Italian Constitution, hereinafter ItConst]. Such a basic level of benefits includes essential levels of public services in the key fields of health, education, social assistance and, to a certain extent, public transport. The functioning of equalization transfers and other purpose-specific grants have always led to conflictual relations between the center and the subnational entities, on the one side, and between one and another subnational unit at the other side (along the North–South divide, and along party ideologies).

Different political narratives have been characterizing not only the formation, but also the development of the Italian regionalism, and its key question of how to best balance the constitutional principles of autonomy and solidarity (Pallaver and Brunazzo 2017). Back in 1948, the Constituent Assembly opted for constitutional asymmetry, and, in more recent times, regional governors (in the North) are calling for ever more political autonomy. It is worth noting that, from the 1990s onwards, it was the Northern League (Lega Nord) that especially called for “devolution”. The political party Lega Nord, founded in 1989 by Umberto Bossi from the merger of six northern Italian leagues, aimed at strengthening the North by truly federalizing Italy and envisaging the creation of three macro-areas characterized by regional economies with different fiscal capacities. Today, under the leadership of Matteo Salvini, the Lega Nord has been renamed Lega, and it pursues different objectives. Regionalism is no longer at the top of its political agenda (Albertazzi et al. 2018).

As anticipated, asymmetric arrangements have become the rule rather than the exception in Italy’s regionalist and, in part, federal-like form of government, not least because of the country’s territorial specificities that characterized the formation of Italy from its very inception. Special regions do enjoy a larger competence catalogue than ordinary regions and they, unlike ordinary regions, also hold separate bilateral relations to the center. Most importantly, they enter into dialogue with the center on an equal footing when it comes to negotiating financial relations.

Against these introductory remarks, at present, Italy’s system of fiscal federalism and financial relations can best be defined as an inverted and thus unstable pendulum. The implementation of the fiscal federalism reform package of 2009, which aims at implementing art. 119 of the ItConst and thus at re-shaping financial relations, is far from being concluded. In Italy, with the 2001 constitutional reform, competences have been further decentralized to major policy fields, but necessary implementing legislation in the fields of fiscal powers and financial relations was delayed and, in part, is still lacking. Moreover, the current composition of the second chamber of the national parliament, the senate, does not guarantee the representation of territorial interests. Several attempts have been undertaken to turn the senate into a federal second chamber by changing its composition and overcoming perfect bicameralism in decision-making (the chamber of deputies and the senate have the same powers). Hence, decision-making processes continue to be lengthy and the interests of subnational entities are, if ever, only indirectly reflected.

The structure of this contribution unfolds as follows: Essential data as to Italy’s territorial organization, its population, and regional economies are offered in the Sects. 1–2. The reasons for the origins and development of Italy’s unequal regional economies and socio-political cultures are discussed in Sect. 2. Section 3 offers a contextual analysis of Italy’s regionalist system from 1948 onwards, and a summary of the main principles of the not yet fully implemented system of fiscal federalism and financial relations. Sections 4–7 discuss the relevance and implications of this system in more detail and give examples from the viewpoint of intergovernmental relations as to the allocation of expenditure responsibilities and taxation powers, and as to the mechanisms of equalization, both in relation to the regional and local levels of government. Section 8, instead, assesses recent trends and the role of key actors in the management of Italy’s system of fiscal federalism and intergovernmental relations. Finally, Sect. 9 evaluates how the system is affected by the outbreak of Covid-19 (as to early 2020).

2 Framing Regional Economies: A Look Back and Forth

From the viewpoint of economic history, Felice (2018; also 2017) argues that the Italian North–South divide existed before Italy’s unification in 1861 and, in some respects, grew even stronger after unification. By referring to data such as the production of specific goods, key infrastructural elements, and components of human capital, Felice shows that the South including Sardinia, at the time of unification, already lacked proper pre-conditions of development (i.e. roads, railways, communications, and level of human capital) compared to those parts of Italy that later on would be named the northern “industrial triangle” (Piedmont, Liguria, Lombardy). Central Italy, instead, occupied an intermediate position.

Back in 1861, the creation of Italy was based on a centralist structure, which aimed at establishing political unity throughout the whole territory by adopting a threefold approach. First, it should protect the unification project against existing centrifugal tendencies. Second, it should compensate the institutional weaknesses of the pre-unification Italian kingdoms. Third, it should unite the very long tradition of local authorities under a common and uniform legislation and administration. In comparison with Northwest Europe, Italy, back then, was generally poor and “making the Italians” (for a clarification of the origins of the expression see Hom 2013) had remained a difficult task also after the conquest of Rome in 1870. In the years to come, the socio-economic North–South divide had been partially reduced, but the central authorities did not manage to properly control and uniform local government within the then three Italian macro-areas (one composed of the Northwest, the Northeast and the Center; and the two other ones being the South and the Islands). Interestingly, unlike today, certain regions in the North were among the poorest (e.g., Trentino-South Tyrol, then part of the Austrian-Hungarian empire). However, it was only in the early 1950s that all regions of the South had fallen behind the regions of the North in economic-industrial terms. This is because of two interlinked factors. First, agriculture came at the forefront in the South. Second, a tariff system and incentives from 1887 onwards had protected industries in the North, while doing so with grain production in the South.

In the aftermath of World War I, Italy moved from a moderate to a strong regional divergence, with the North, unlike the South, profiting from subsidized modernization efforts by local entrepreneurs that managed to prove themselves capable of modernization also in the period during World War I and II. As pointed out by Felice (2018, 15), in terms of per capita GDP, the three “Italies” of 1951 gave way to only two clearly defined “Italies” by 2011, i.e., the North and Center, and the South named Mezzogiorno (see also Dunford 2008). This is because the economic policy favoring the South never really succeeded in empowering southern regional economies. Incentives provided from the central authorities, so Felice, became a source of power for local political elites instead of promoting socio-economic development.

Recent data confirm such an interpretative strand (see Table 1). The GDP per capita (nominal income) in northern regions is significantly higher than the one in southern regions. Some regions/autonomous provinces of Italy are well above the average (such as the autonomous province of Bolzano/Bozen), while others are well below the average (such as Calabria). If compared with regional economies at the European level, data regarding the autonomous province of Bolzano/Bozen, an entity also defined as a quasi-federal reality in Italy (Woelk 2013: 126), show how well-off South Tyrol is in economic terms (Eurostat 2019). As an Alpine border territory, South Tyrol is one of Italy’s territories that most effectively makes use of its political autonomy and shows how asymmetry in constitutional design can contribute not only to settle a conflict (Alber 2017), but also to enable a territory in the development of socio-institutional capital that suits local needs, and that ultimately leads to prosperity (Valdesalici 2018).

Table 1 Basic data
Full size table

Constitutional design, however, is only one part of the solution. The development of Italy’s two-track regionalist State structure from 1948 onwards proves this. The twenty regions, fifteen having an ordinary statute (i.e. basic law) and five having a special statute made different use of their scope of action (with the special region Trentino-South Tyrol being “special among the specials” as it is subdivided into the two autonomous provinces of Trento and Bolzano/Bozen that hold most of the powers). Each special region has developed its own degree of autonomy in terms of the form of government, distribution and use of legislative and administrative competences, and financial arrangements (laid down in the respective special statutes that, unlike the statutes of ordinary regions, have the rank of a national constitutional law). Ordinary regions were established later than special ones and only some of them, most recently, have started negotiations with the central authority over enhancing their competence catalogue (by making use of art. 116 par. 3 ItConst, a constitutionally enshrined procedure providing for the transfer of additional competences from the center to a region; see Arban 2018 and Sect. 9). In sum, from a constitutional viewpoint, Italy essentially includes two categories of regions. The special regions with different degrees of autonomy, and the ordinary ones that are, as a rule, embedded in a multilateral system of intergovernmental relations, but, from the 2001 constitutional reform onwards, have the possibility to bilaterally negotiate the transfer of additional legislative powers with the central government (see Sect. 9 in more detail).

3 Explaining “Federal” Regionalism: Determinants and Their Implications

Most recently, Pallaver and Brunazzo (2017) aptly summed up the creation and the development of Italy’s regionalism by defining it as being caught in the pendulum of “federal” regionalism. Especially from the 1970s onwards, with the establishment of the ordinary regions and further reform seasons starting in the late 1990s, Italy has found itself in a sort of pendulum that swings back and forth between phases of centralization and decentralization (Baldini and Baldi 2014: 87). Such phases are typical for federal systems, especially but not exclusively from the viewpoint of fiscal federalism and financial relations. So are the reasons of (reforming) the rules concerning fiscal federalism and financial relations in “mature federations” such as Germany and Switzerland less linked to the growth of power decentralization; they are rather perceived as an opportunity and necessity for enhancing the competitiveness of economic performance, and for bringing coherence to a system by adjusting it to new scenarios (Alber and Valdesalici 2012: 327–328).

In Italy, a not yet fully federal system, the need for a functioning system of fiscal federalism and financial relations does come as a consequence to reform seasons that pursued an ever more decentralized administration (and thus of spending responsibilities). Back in 1948, the Constituent Assembly opted for an asymmetric system of the territorial organization due to the presence of linguistic minorities, secessionist fears, and geographical particularities in the peripherical territories. Supporters of a federation had to come to terms with supporters of a unitary State (Pallaver and Brunazzo 2017: 151–154). The regional two-track design did, however, not properly dismantle Italy’s unitary tradition dating back to the unification of Italy in 1861. It took too long to establish ordinary regions. Once they were established in the 1970s and vested with further powers in the late 1990s, they were not endowed with the parallel transfer of civil servants from the central ministries. In addition, the regions themselves did not use the scope of autonomy they were given in order to develop institutional structures that would better suit their needs (by turning available capacity into capability, i.e., the enhanced capacity by collaboratively making use of favorable pre-conditions). Put differently, in 1997–1998, when putting into place a series of measures aiming at creating a more efficient public administration capable of ensuring higher quality (the ‘Bassanini Laws’), both the central and regional authorities missed an opportunity to properly implement the reforms (Pallaver and Brunazzo 2017: 155–159). The transfer of powers from the center to the regions by means of ordinary legislation did neither come with the necessary resources from the central ministries to the regions, nor was it supported by the development of proper regional political cultures (Newell 2010). Hence, the greater autonomy given to public administrations in terms of personnel and controls only scarcely succeeded in establishing a relationship of greater trust between the citizen and decentralized administration, not least because the quality of administrative performance and policy output continued to be very different throughout Italy (Vassallo 2013). In addition, the centralistic political party system did not give space to the development of regionally anchored political cultures—with the exception of the systems in place in the special regions Aosta Valley and Trentino-South Tyrol.

The 2001 constitutional reform re-wrote Title V of the ItConst. Regarding the relations between the center and the regions, it revised the distribution of competences and re-shaped their financial relations (art. 117–119 ItConst). Up to 2001, ordinary regions could only legislate in a number of subjects enumerated in the ItConst and only within the framework outlined by a national law. Special regions, instead, were vested with a broader scope of autonomy within the legislative—often exclusive—powers laid down in each autonomy statute. The 2001 constitutional reform eliminated this difference by turning the distribution of legislative powers upside down. Exclusive legislative competences of the center as well as subject matters of concurrent legislation (the center is responsible for the principles and the regions for the details) are now listed in the ItConst (art. 117 par. 2 and par. 3). Regions have residual legislative competences in all remaining areas. While both ordinary and special regions are vested with financial autonomy on the spending and revenue side, the financing systems of special regions greatly differ from that of ordinary regions because of the bilateral negotiations that have been evolving since 1948 (and in the case of Friuli-Venezia Giulia since 1963, with the adoption of its autonomy statute). Each special region enjoys a regime of financial autonomy that is based on a share of State taxes referable to the territory (from 25 to 90 %). Ordinary regions, instead, greatly depend on transfers from the center.

As of early 2020, the envisaged system grounding the regions’ finances on “autonomous resources” (i.e. tax-revenue linked to the territorial fiscal capacity, a core principle of the fiscal federalism reform in 2009) has not yet been fully implemented. Put simply, the new system foresees that financial coverage to decentralized responsibilities is to be provided by autonomous resources (including own taxes and tax-revenue sharing on a territorial base) and equalization transfers. In this respect, the central authority will no longer be the paymaster of last resort. The principle of historical expenditure (i.e. transfers calculated on the last year’s expenditure) shall be replaced by a model considering standard costs and needs. Such a model shall be calculated against established efficiency benchmarks. All in all, the regime of fiscal federalism and financial relations as laid down in law no. 42/2009 (and its implementing legislation) aims at providing a system resting on five pillars: financial and partially also fiscal autonomy, tax-revenue sharing on a territorial base equalization transfers the criterion of standard costs instead of the principle of historical expenditure, transparent and accountable budgeting performance. Such a system would, at last, implement art. 119 of the ItConst that reads as follows.

“Municipalities, provinces, metropolitan cities and regions shall have revenue and expenditure autonomy. Municipalities, provinces, metropolitan cities, and regions shall have independent financial resources. They set and levy taxes and collect revenues of their own, in compliance with the Constitution and according to the principles of coordination of State finances and the tax system. They share in the tax revenues related to their respective territories. State legislation shall provide for an equalization fund—with no allocation constraints—for the territories having lower per capita taxable capacity. Revenues raised from the abovementioned sources shall enable municipalities, provinces, metropolitan cities, and regions to fully finance the public functions attributed to them. The State shall allocate supplementary resources and adopt special measures in favor of specific municipalities, provinces, metropolitan cities, and regions to promote economic development along with social cohesion and solidarity, to reduce economic and social imbalances, to foster the exercise of the rights of the person or to achieve goals other than those pursued in the ordinary implementation of their functions. Municipalities, provinces, metropolitan cities, and regions have their own properties, which are allocated to them pursuant to general principles laid down in State legislation. They may resort to indebtedness only as a means of funding investments. State guarantees on loans contracted for this purpose are not admissible.”

4 Discussing the Rules of the Game: The Allocation-Scheme

As the earlier parts have shown, Italian regionalism is characterized by an asymmetrical design, both as a matter of constitutional law and in terms of effective use of powers transferred to the regions. Five out of twenty regions have a special status: Sicily, Sardinia, Aosta Valley, Friuli-Venezia Giulia, and Trentino-South Tyrol. Trentino-South Tyrol is subdivided in the two autonomous provinces of Trento and Bolzano/Bozen, which, however, regarding their competence catalogue are comparable to a special region. Each special region has not only a different system of powers, but also a different financing system that is, unlike in the case of ordinary regions, bilaterally negotiated with the central authority. Moreover, ordinary regions were granted a large scope of autonomy much later than the special ones. Though at first sight simple, the new criteria of power distribution between the central authority and the regions from 2001 onwards mask extensive ambiguity. It has given rise to tensions and an enormous increase of controversies between the two levels of government. Therefore, the constitutional court ultimately was and is largely re-writing the division of legislative competences, most recently to the detriment of the regions (Palermo and Valdesalici 2019: 298–299).

As anticipated in Sect. 3, implementing legislation as to art. 119 ItConst has been missing for many years, notwithstanding the fact that it was considered a milestone of the 2001 constitutional reform. Only in 2009, law no. 42 laid down the main features and trajectories of the new system. It took another two years until all relevant enactment decrees and bylaws to this framework law were adopted (Valdesalici 2014: 77–81). Considering the complexity resulting from the implementing legislation, several unexpected political drawbacks, and the austerity politics during the economic crisis, today it is still rather difficult to give concrete evidence of the exact status quo of its implementation.

To better understand the rules surrounding the allocation of expenditure responsibilities, we need to take a step back. With the 2001 constitutional reform, all territorial entities have been vested with enhanced financial autonomy. Pursuant to art. 119 ItConst, municipalities, provinces, metropolitan cities, and regions shall have financial autonomy both on the revenue and expenditure side. However, such financial autonomy must be balanced against the principles of solidarity, coordination, and cohesion. As such, it is strongly limited by the actions the central authorities undertake in the field of coordination of public finance. In addition to that, pursuant to constitutional law no. 1/2012, all territorial entities shall respect the principle of a balanced budget and contribute to the enforcement of EU obligations (see details in Ciolli 2014).

One of the major expectations linked with the reform was the constitutional recognition of the autonomy on the revenue side. It was conceived as one of the most interesting innovations in order to make subnational and local levels of government more accountable. However, no revolution of the status quo ante has taken place: under the new scheme territorial entities, especially regions, keep most of the tax revenue they had under the previous system (Muraro 2011). Their taxing powers have been reinforced only to a little extent. The intention of abolishing central transfers to both regions and local entities is, however, noteworthy (with the exception of non-earmarked equalization transfers that will still be in place). Subnational financing shall from now on be based on tax-revenue linked to the fiscal capacity of each territory, not anymore on the principle of historical expenditure. In addition to that, the equalization of resources shall be gradually based on standard costs and needs, which are calculated in relation to each “essential” public service. In other words, a system of predefined and standardized costs shall substitute the principle of historical expenditure. Besides that, the legislative power to tax mainly lingers in the hand of the national legislature and a wide-scope equalization scheme is confirmed, though according to the new “standardized” concept thoroughly described in Sect. 7.

Italy’s system of fiscal federalism and financial relations, however, can only be fully understood if one considers the entire block of financial-related constitutional provisions laid down in the 2001 constitutional reform. This means that one has to undertake a combined reading of the art. 119, 117, and 118 of the ItConst. As already explained, art. 117 of the ItConst lists the exclusive legislative powers of the national legislator as well as the concurrent ones, while residual powers lie with the regions. Regulatory powers (art. 117 par. 6 ItConst) are vested with the central authority for issues linked to national exclusive legislative powers (unless they are delegated to the regions). In all other matters, regulatory powers are assigned to the regional level. Local entities have regulatory powers associated with the organization and implementation of the functions attributed to them. At the same time, art. 118 of the ItConst by referring to administrative functions establishes that, as a rule and in compliance with the principles of subsidiarity, differentiation, and proportionality, they are assigned to the municipal level and thus to upper levels of government only in case of necessity.

Conversely, the rules for special regions differ from the above-illustrated principles. Legislative powers of special regions are assigned according to their statutes of autonomy. However, when the 2001 constitutional reform provided ordinary regions with a greater degree of autonomy, this also extended to special regions as long as their statutes were not updated (art. 10 constitutional law no. 3/2001). As to administrative functions, their systems are based on the principle of parallelism. This means that they hold administrative powers in the subject matters they are attributed legislative powers. In practice, they mostly delegate them to municipalities (and other second level local entities).

A close look at the functioning of the constitutional allocation of legislative competences immediately illustrates the Italy’s inverted pendulum of fiscal federalism and financial relations. Regional legislation in matters of concurrent legislation is de facto subordinated to national legislation. In theory this means that the national legislature defines fundamental principles, while the regional legislature does legislate on details. In practice, however, this competence type has turned out to be a powerful tool of centralization. The same is valid in case of cross-cutting matters. Emblematic to this regard is the national exclusive legislative power as to the “determination of the basic level of benefits relating to civil and social entitlements to be guaranteed throughout the national territory” [art. 117 par. 2 lit. m) ItConst]. Irrespective of the matter at hand, whenever a regional law provides for benefits related to civil and welfare rights, it must comply with the standards set by the national law regarding those rights. This is not considered a competence title in the classical sense, but it is considered of cross-cutting nature. As such, the national law is allowed to intersect different matters also of regional competence if this is necessary to ensure public functions and services to all citizens within the entire national territory, as the regional law cannot constrain essential rights. This reading has frequently given rise to conflicts in front of the constitutional court, and an extensive interpretation of the central authority powers has mostly prevailed.

Also, even though all residual (not-enumerated) competences lie with the regions (art. 117 par. 4 ItConst), the nature of financial relations essentially is centralistic. This is due to five reasons. First, the national legislature holds the exclusive legislative power over the “major taxes” (see Sect. 6). Second, it does so also regarding the “equalization mechanism” (see Sect. 7). Third, central authorities are the ones being tasked with determining the “essential levels of public services”. Fourth, central authorities are also the ones responsible for the “harmonization of budgets of all public entities” and of the enforcement of “the principle of balanced budget”. Fifth, the competence on the coordination of both the public finance and the tax system is included in the list of concurrent competences, thus the national legislature ultimately has the upper hand. On this last point, especially as of 2010, the intervention of the national level of government has often gone beyond the determination of the basic principles by introducing detailed regulations. Furthermore, the constitutional court has given an extensive interpretation to what can be considered a “fundamental principle of coordination of public finance”. Thus, the scope of national legislation at the expense of both regional financial autonomy and, in general, the political autonomy of territorial entities has been further expanded (among the many, see judgments no. 198/2012, 262/2012, 236/2013, 23/2014, 38/2016, 69/2016, 154/2017). The court’s reasoning rests on the fact that this is not to be considered a “competence-title” in the traditional understanding. It is the purpose-oriented nature of coordination that is of relevance. Because of this interpretation, the principle of coordination of public finance is to be understood much more as an exclusive competence rather than a concurrent one. If any, a safeguard to protect subnational autonomy could be found in the principle of loyal cooperation (i.e. the necessity of cooperation and integration between the levels of government). Accordingly, the central authority must make all possible efforts to reach an agreement with subnational entities when decisions affecting their (financial) interests are taken.

5 Discussing the Rules of the Game: Spending Autonomy

The allocation-scheme and its implications also heavily affect the spending autonomy of subnational entities. To understand how this occurs, we must reflect on the scope of legislative and administrative powers. As a rule, the more competences an entity has, the more spending autonomy it enjoys. Considering the spending composition of the regional budgets, data show that ordinary regions are responsible (or co-responsible) for health care, education, environment, social assistance, and economic development. On average, health care spending amounts to more than 50% of the total regional spending, while the administrative apparatus absorbs around 20% of the budget. These are followed by economic affairs (12.8%) that, among others, include local public transport and infrastructure, productive and tourism-related activities. Whereas social assistance and environment are at 3% each, education is only at 2%. The remaining 10% is divided among all other regionally (co-)financed functions (e.g., culture, housing and territorial planning, public safety, water protection and utilities). Palpable discrepancies exist among the regions and mostly reflect the North–South divide. Northern regions’ spending is in fact above the national average in all sectors, except for public safety and environment (ISSiRFA 2019).

Special regions present a different picture. As a rule, their spending autonomy is broader than the one enjoyed by ordinary regions, although the ongoing federalizing process aims at reducing the gap. However, in this regard, it is arduous to identify a common pattern, due to the mechanism of bilateral relations they rely on. Each special entity has developed the scope of its self-government in a different way, because of territorial and socio-political peculiarities. This affects the degree of spending autonomy each entity has. For instance, the Aosta Valley and the two autonomous provinces of Trento and Bolzano/Bozen have a broader spending autonomy in the education sector than the other special regions. Their competence-catalogues include both the teaching and the administrative staff (due to the existence of linguistic minorities with special rights; Alber and Trettel 2018). The spending in the health sector offers another example of how special regions differently make use of their scope of autonomy and of how they are different from ordinary regions, too. The special regions in the North do not receive any transfers from the National Health Fund, whereas the ordinary regions do. Indeed, health makes up the biggest part of the transfers from the center in ordinary regions.

Moreover, special regions, unlike ordinary regions, have exclusive legislative and regulatory competence over the system of local government, while respecting the limits set forth by the statutes themselves to their legislative competence (D’Orlando and Grisostolo 2016). In ordinary regions, instead, the system of local government is subject to national legislation (art. 117 par. 2 ItConst reads that the national legislature has exclusive legislative competence on “principles of electoral legislation, governing bodies and fundamental functions of municipalities, provinces and metropolitan cities”). At this stage, it shall be noted that the residual margin of autonomy vested with the regions is very limited and concerns, for example, forms of intermunicipal cooperation. In addition to that, all northern special entities are fully in charge of local finance, whereas in other special regions (i.e. Sicily and Sardinia) this depends on the center.

Regarding spending responsibilities, it is important to stress that each entity can freely decide on how to spend the available resources, including not only own-tax sources, but—as a rule—all resources. As a matter of fact, only a minor part of the regional budget is earmarked (<15%). This basic assumption has to come to terms with the need to ensure on the whole territory public services in the field of education, healthcare, social assistance, and—to a certain extent—also public transport at the essential levels set forth by the national legislature. Regarding these functions and related levels, spending autonomy is somehow guaranteed by the fact that equalization transfers are not earmarked and shall be distributed on the basis of standard costs and needs. Hence, regions are free to spend more or less money, provided that the essential levels of services are safeguarded.

Besides the abovementioned, the ongoing non-implementation of the 2001 constitutional reform adds further complexity when trying to answer the question of how the system works in practice. The central authority is lagging behind. Due to the delayed and desultory implementation of the new rules in fiscal federalism and financial relations, the national legislature has not yet fixed the essential levels of services, with the sole exception of healthcare.

That said, the functioning of the system shows that—in particular, but not exclusively—ordinary regions are bound to respect a couple of additional limitations. First, the austerity measures adopted to cope with the economic crisis have meaningfully reduced transfers to the regions. The legislative decree no. 78/2010, for instance, reduced the transfers from the center to the ordinary regions by 4.5 billions and the ones to the special regions by 1 billion. In 2012, capital expenditure also decreased significantly (−8.4%), especially due to the contraction of investments (−7.1%) (Banca d’Italia 2013). Second, the national level of government has introduced heavy restrictions to regional spending. These links of measures have been used by the national government as privileged tools of spending reviews (Alber 2014: 162–167). The constitutional court in many cases has deemed the constitutionality of these legal acts, even though they contain measures addressing specific sectors the regions would be responsible for (e.g., regional personnel and turnover, number of seats in the regional governing bodies, participated regional enterprises). This was possible because of the extensive interpretation given to the concurrent competence on coordination of public finance, grounded in the need to comply with the obligations stemming from the European Union’s economic governance framework and to ensure the enactment of the principle of balanced budget. Accordingly, the measures are justified to the extent that they set an overall and temporary limit, and also because they leave a margin of discretion to the regions when it comes to the allocation of revenue between the different sectors. However, the abovementioned criteria ultimately leave ample room for maneuver to the national legislature.

6 Discussing the Rules of the Game: Taxation Responsibilities

As explained, the ItConst fosters the self-sufficiency of all subnational entities. Pursuant to art. 119 ItConst, regions, municipalities, provinces, and metropolitan cities must fully finance their functions by means of own-tax sources, shared taxes, and non-earmarked equalization transfers. Additional transfers shall be provided only for exceptional cases. In brief, subnational and local entities must ground their financing on “autonomous resources” (Rivosecchi 2010: 121–142). Despite the linkage between territorial financing and tax-revenue generated within the territory, the tax system remains centralized. All major tax-revenue sources are placed under the legislative authority of the center, with minor exceptions (Jorio 2010).

As to ordinary regions, “regional taxes” are classified into three categories. First, “devolved taxes” are set by a national law but devolved to the regions as far as both the revenue and a limited varying power are concerned. Second, “regional surtaxes” that are on top of those national taxes in relation to which regions are allowed to impose an extra charge, within the limits set forth by the center. Third, “autonomous own taxes” that are taxes set by a regional law on a tax-base not preempted by the State. Following this classification, the most relevant revenue sources of ordinary regions include the revenue from a tax on business (so-called IRAP—regional tax on productive activities) and the surtax on the Individual Income Tax (so-called IRPEF). The regional surtax on individual income tax consists of a basic rate of 1.23% (since 2011) as well as an optional rate (up to 2.1% as of 2015) to be applied within certain limits. Regions may also vary the tax rate of the regional tax on the income of the productive activities (so-called IRAP) and eventually reduce it to zero. Autonomous own taxes are very few and the yields are marginal (e.g., the special tax for the landfill of waste).

This scheme results from the stringent limits put in place when it comes to taxing powers of regions with, on the one hand, the prevention of double taxation on the same tax-base, and the constitutional arrangement as to taxing powers on the other hand. The ItConst does not list the own taxes of each governmental level. According to art. 117 par. 2 ItConst e), the center has the exclusive legislative competence over the national tax system, while the regions are granted an exclusive legislative competence over the regional tax system (residual clause, art. 117 par. 4 ItConst). Furthermore, the established doctrine of the constitutional court additionally restrains the scope of autonomy. On the one hand, regional taxes are only those set and regulated by a regional law. This means that they are very few because the fiscal legislation is almost entirely preempted by the national legislature (judgments no. 296/2003, 297/2003; 216/2009; see Nicolini 2010). On the other hand, regions may exert their taxation powers only in compliance with the principles of financial and fiscal coordination set forth by the national authority. As the constitutional court has opted for an extensive interpretation regarding the principle of coordination of the tax system, this de facto nullifies the regional role in tax matters (among the many, see judgments no. 37/2004, 199/2016). Thus, it is mainly the center that sets a tax (e.g., IRAP) and then decides on the powers and shares to be conferred to the regions. On top of that, for several years, the national budget laws have frozen the regional powers to apply surtaxes or vary the rates, with minor exceptions (e.g., the tourism tax).

Notwithstanding all these problems, regional financial autonomy on the revenue side has been somehow consolidated and tax flexibility has been reinforced. At the beginning these powers have remained on paper for long, as several national acts have frozen the powers of the regions to vary tax rates. In 2016, however, regional taxes considered as a whole (i.e. autonomous and devolved) amounted to 45% of the regional budget, while only to 14,8% in 1990 (Istat 2016). Against this picture, tax competition is kept to a minimum from a comparative perspective, although at present the territorial differentiation regarding tax pressure is becoming somewhat sensitive. Still it affects mainly the category of the devolved taxes such as the regional tax on productive activities and the regional surtax on the individual income. As to the latter, the varying power over the tax rate has also translated into diverse solutions. Some regions have introduced a single rate disregarding the income level, while others have opted for a progressive tax rate. However, differences are more significant regarding the regional tax on productive activities, with the option to intervene on the tax rate, the possibility to differentiate it because of the involved sector or taxpayers’ category, the obligation to increase the tax rate in case of deficits in the health care sector, and the power to introduce exemptions, deductions, or tax allowances (Court of Auditors 2019). At this stage, it shall also be noted that tax administration, except for regional and local own taxes, is all in all centralized.

Local finance, in the period 2010–2020, also underwent changes due to the implementation of the 2001 constitutional reform. Its structural metamorphosis has been marked by an overall increase in local taxes and a correspondent decrease (−32%) of transfers from the center (IFEL, 2019, with all data on local entities in the chapter referring to the year 2018, if not otherwise specified). At present, the system of financing of local entities within ordinary regions is mostly based on “devolved taxes”, that is taxes set and regulated by the national legislature, whose revenues are devolved to local entities. Regarding municipalities, tax-revenue accounts for 46% of the overall revenue. Municipalities are also vested with tax-varying power in some revenue sources. For instance, they can vary the optional tax rate of the surtax on individual income (IRPEF), within the upper limit of + 0.8%. Tax exemptions can also be introduced respecting the restrictions prescribed by the national legislation. In this case, local own-tax sources represent an exception to the general scheme. The tourist tax is one example. The national law entitles municipalities with the full authority to impose this tax, provided that they remain within the upper limit set by the national government (legislative decree no. 23/2011). The financing scheme of provinces and metropolitan cities replicates the same structure. Thus, it rests mainly on devolved and shared taxes, plus equalization transfers. However, the legal framework is complex and uncertain. As to the provinces, this is the result of the national austerity measures that have progressively reduced the transfers, on the one hand. On the other hand, the undergoing process of territorial reorganization regarding the (reductions of) functions allocated to the provincial level also played a role in the same direction. As to metropolitan cities, the situation is even more ambiguous. They were finally established in 2014 (by law no. 56/2014), but their system of financing remains undefined. The result is that the provincial scheme still applies to them and resources to metropolitan cities have generally been reduced, entailing problems of underfunded mandates (Kössler and Kress 2021).

Own taxes are negligible also in the case of special regions. This occurs although the constitutional constraints imposed on their taxation powers are in theory more relaxed. On the other hand, the fiscal room is almost entirely exhausted by State taxes and the political costs for imposing a regional tax are thus well above the expected economic gains. As such, “autonomous own-taxes” are residual also in this case. More interesting are the yields that special regions collect from “devolved taxes”. They are entitled to the entire amount that accrues to ordinary regions from the regional tax on productive activities (IRAP) and the surtax on individual income tax. Interestingly in this respect is the fact that special regions are vested with a wider tax-varying power. Within the limit of the maximum tax rate set by the national law, they can introduce whatever alteration of the tax burden on “devolved taxes”. The constitutional jurisprudence has accepted an extensive interpretation of the tax-varying power special regions are entitled to by their special statutes, paving the way for more differentiation of fiscal policies (judgments no. 357/2010, 323/2011, 12/2012). Conversely, ordinary regions can only introduce those variations explicitly allowed by the national legislation. However, overall, the margin of discretion as to taxing powers of subnational and local entities is rather limited. This will also be the case in the future. The constitutional court stresses the role of the national legislature in tax-related matters, on the one hand. On the other hand, there is no pressure for change from the subnational level. At present, the taxation system barely guarantees tax harmonization and the respect of the constitutional constraints (i.e. the criteria of progressivity of the tax system and the requirement of a tax effort linked to the fiscal capacity; art. 53 ItConst).

7 Discussing the Rules of the Game: Intergovernmental Fiscal Transfers and Revenue-Sharing

The strong centralization of the tax system together with the significant decentralization of spending responsibilities give rise to a noteworthy vertical fiscal gap (i.e. own taxes do not cover spending needs). This applies to both the local and—above all—the regional levels. Besides own and devolved regional taxes, the national level of government can resort to the following instruments to cover the gap: tax-revenue sharing on a territorial basis and equalization transfers.

To this extent, a share of VAT is in place for ordinary regions (67.07% in 2018), with revenue thereof distributed according to the statistical data of the final consumptions of families, calculated on average on a regional basis. However, the related revenues are not devolved to the single region, but they are used to finance the equalization fund for health care. As such, the amount of revenue calculated on the basis of the derivation principle is then corrected in accordance with the prescribed equalization formula. Depending on the region at stake, the share of VAT covers between 65 and 92% of the regional spending on health care (Bordignon and Ambrosanio 2020). Other than sources linked to a share of tax-revenue generated within the territory, the only constitutionally legitimate intergovernmental grants are non-earmarked equalization transfers from a fund, which has to be established by the national level of government. In fact, the center is vested with the exclusive legislative competence on the equalization system (art. 117 par. 2 ItConst).

Equalization is considered as a crucial component of the Italian system of territorial organization. This is because along with discrepancies in territorial wealth fiscal capacities also oscillate. Taking for instance the net yield of IRPEF the per capita amount of the northern regions is double that of the southern ones (Bordignon and Ambrosanio 2020). The unemployment rate is also particularly telling. While the national average is 10.6%, it reaches 18.4% in the South and only 6.6% in the North. As to variations in human capital, a useful indicator could consist of the results of nation-wide tests (so-called INVALSI) students must take each year. Once again data confirm the North–South divide (with Calabria lagging well behind the group). The quality of decentralized spending significantly varies, too. For instance, inter-regional migrations for health care purposes involve all regions of the South (except Molise). Even though differences can, to a certain extent, be attributed to the morphology or to socio-cultural characteristics of the population inhabiting a region, such huge discrepancies throughout Italy can only be explained by the inefficiency of the public administration.

To this regard, the 2001 constitutional reform has mandated, inter alia, the introduction of a new model of equalization that should allow a standardization of territorial financing and foster efficiency and accountability (Antonini 2009; Ferrara and Salerno 2010; Jorio et al. 2009). A twofold mechanism of equalization is envisaged. The first, the “standard approach”, refers to guaranteeing “essential levels of services” in the sectors of health, education (for administrative spending only), welfare, and public transport (capital spending only). The services in the essential sectors must be fully guaranteed throughout the country, thus fully supported by the equalization system. Transfers shall, however, in any case be based on standard criteria and not on effective needs. The equalization quota shall be calculated to cover the gap between the standard need and the tax-revenue of the related territory. If the difference is negative, the region will benefit from equalization; otherwise, it will be a net contributor. Tax-revenues to be taken into consideration are the “devolved taxes” (i.e. IRAP), the regional surtax on individual income tax, as well as the regional share of VAT [art. 8 par. 1 d), law no. 42/2009]. Moreover, the standard needs will be calculated on a regional base according to the standard costs as related to the essential levels. The second mechanism shall be in place for all other (residual) regional functions. In this case, the center does not define any common national standard. The single region decides the level of services to be provided and the transfers ensure only a partial equalization. Differences in terms of fiscal capacity per capita will be abridged up to 75%. Even in this case, however, the mechanism is far from being effectively implemented.

At present, the “transfer-based” system of regional financing that has remained untouched for years is, to a great extent, still in force. This is because of the considerable delay of the implementation of the 2001 constitutional reform and its implementing legislation. Neither has the model of standard costs and needs been calculated in full detail yet, nor has the national legislature fully determined the essential levels of services to be guaranteed throughout the country. Moreover, the fiscal capacity per capita has not been calculated yet. The health sector represents a partial exception to this picture. However, having a closer look at the methodology applied, it emerges that the distribution of the Health Care Fund is not based on standards, but it is linked to the demographic parameter (weighted population) as it was the case under the previous system (Bordignon and Ambrosanio 2020).

An analogous equalization mechanism has been foreseen by the 2001 constitutional reform to remedy imbalances among local entities. As in the case of regions (i.e. in relation to the essential levels of services), the center holds the exclusive legislative power over the determination of the fundamental functions of local entities to be ensured in a uniform manner throughout the country. The gradual overcoming of the funding system based on the historical expenditure in favor of a model of standard costs and needs is also envisaged for local government. Based on a twofold classification of decentralized functions, also in this case, two equalization mechanisms shall be established. A first mechanism must ensure the funding of fundamental functions (approximately 80%), while a second one the funding for all other residual and thus non-fundamental functions (approximately 20%). The details as to the mechanisms (methodology and definition of parameters) have been specified in governmental decrees (e.g., law decree no. 216/2010 as later modified), while a public–private company (SOSE) is tasked with the calculation of the standard costs and needs. These must be calculated for each fundamental function and by taking into consideration the peculiarities of the single function and other characteristics of the local entity (e.g., the size). It shall be noted that, within this complex legal framework, the Stability Law 2013 (law no. 228/2012) has set up a Fund of Municipal Solidarity. The Fund is financed through a share of the revenue generated from the local tax on properties—IMU (38.23% in 2015, 24.43% in 2016)—and only a selection of local tax revenues are taken as a benchmark to determine who is entitled to benefit from it. In 2016, the equalization resources distributed on the basis of the new standardized parameters amounted to 30% of the Fund, while the rest was allocated taking into account the principle of historical expenditure. The new system should have fully entered into force by 2021, but de facto as of 2021 additional functions are equalized basing on standard requirements, but the historical expenditure criterion has not yet been completely abandoned.

Regarding the provinces as second level local entities, they receive equalization transfers from the so-called “experimental fund for financial consolidation”. This is financed with the provincial share of the individual income tax (0.6%). Although the fund has been in place since 2012, it is meant to be a temporary measure. In fact, an equalization fund like the one illustrated above for municipalities should be established. The financial endowment of the experimental fund is shrinking year after year, in order to ensure that also provinces contribute to the consolidation of national public finance. In addition to that, the austerity measures imposed by the center have progressively reduced to zero the other transfers to provinces. Furthermore, the national level of government has started a process of territorial reorganization regarding in particular the (reductions of) functions allocated to the provincial level. The provincial scheme is temporarily extended to metropolitan cities. Local entities should not receive transfers other than equalization ones. In practice, a few exceptions are in place (e.g., for tiny and increasingly depopulated municipalities).

The financing systems of special regions present a significantly different structure. They are mainly based on a share of well-determined national taxes, calculated in the appliance of the derivation principle. However, significant differences can be detected among them. The list of shared taxes is provided in a specific provision of the special statute and can potentially encompass all State taxes. Although with variations, all entities are thus entitled to a share of the major taxes (e.g., on consumption and on income). The sharing quota is widely diversified, as it varies from a minimum of 25% to a maximum of 90%, while some entities receive the entire amount of certain taxes. As a rule, the share is higher for those special regions vested with major spending responsibilities (e.g., Valle d’Aosta and Trentino-South Tyrol). The same applies to the number and the types of taxes that are shared. Finally, also the sharing criteria are different. In any case, the parameter of apportionment tends to match the allotted amount to the revenue raised within the territory of reference.

In addition to the prominent role vested by shared taxes, the twofold equalization scheme foreseen for ordinary regions does not apply to them. According to law no. 42/2009 (art. 27), special entities should bilaterally agree with the national government upon their contribution to equalization and to the recovery of public finance (including the obligations imposed by the EU). In this case no “one solution fits all” is possible. In practice, it goes along with the economic development. The richer entities contribute proportionally more than the poorer. Several bilateral agreements have been signed in the last years as to the respective contribution to the system of national equalization and to the consolidation of national public finance in the light of the ever more stringent EU obligations. In addition to that, the arrangements have resulted for the northern special regions in an enhancement of their political and financial autonomy. Revenues at disposal have been reduced, on the hand. On the other hand, additional competences have been transferred to them. Although this has been done at the expense of the regional financial endowment, their political autonomy has been reinforced.

As a result of this additional asymmetry, grants tend to be generally less consistent in special regions than in ordinary ones. Nevertheless, even in this case inter-regional discrepancies are profound. In general terms, while the northern special regions tend to rely much more on revenue linked to taxation, the two islands—and Sicily in particular—depend much more from direct transfers from the center (e.g., in the health care sector). To a certain extent, the varying relevance of these different components seems to reflect the existing cleavage in the economic performance.

The asymmetry that characterizes the overall system of the territorial organization also affects local finance. In fact, the above-described system applies to local entities within ordinary regions. For special regions rules are different. First, the general financial rules do not directly apply to them, but they have been asked to reform their systems according to the same basic principles. The specific regulations must be agreed between each special region and the center in a bilateral negotiation. In short, special regions enjoy a higher degree of financial autonomy, but they differ one from the other to a great extent. Second, some special regions run local finance (the northern ones), whereas in others (Sicily and Sardinia) this remains with the center. In this respect, the only exception is represented by the responsibility of all regions (special and ordinary) to ensure the respect of the principle of a balanced budget by taking into account all territorial entities with the regional territory of reference.

As to this last point, all territorial entities shall ensure the equilibrium of their budgets to concur with the compliance of the EU’s economic and financial restraints. The new legal framework (law no. 243/2012 as amended by law no. 164/2016) imposes limits to deficits and to the possibility of incurring debts. At the same time, it sets strict limitations to regional overspending. Hence, deviations from the equilibrium could occur, although each region has to ensure the recovery of the deficit through the adoption of a loan repayment plan. Surpluses shall be used either to cover the existing debts or for investment expenditure. To this end, an agreement between the region and the center should be reached, to ensure the balance between revenue and expenditure taking into account all entities within the region (including the region itself).

8 Assessing Recent Trends: The Persistent Lack of Coordination

Unlike a normal pendulum that is stable when hanging downwards, an inverted pendulum is essentially unstable and must be actively balanced in order to remain upright. The task to actively balance the pendulum is, as of early 2020, in the hands of the center—first and foremost because of the Covid-19 emergency (see Section 9), but not exclusively. When it comes to the rules of the game in fiscal matters and financial relations, it was and still is the central authority in Rome that ultimately determines them. As earlier shown, only in some regions, that is in the northern special regions, the subnational governmental level—in the case of the special region Trentino-South Tyrol, the two autonomous provinces of Trento and Bolzano/Bozen—regularly co-decide how financial relations shall look like by means of bilateral negotiations and they do so to a varying degree.

In order words, the inverted pendulum regarding fiscal and financial issues in Italy is, as a rule, balanced by applying a torque at the pivot point that is centrally steered, and not by moving the pivot point horizontally as part of a feedback system in which its multiple territorial actors enter into dialogue on an equal footing. Moreover, the management of fiscal and financial matters is fragmented across multiple bodies in a manner that lacks coordination. For example, and most importantly, this is the case when it comes to tax administration functions. Latter ones are fragmented across multiple bodies to which different rules apply in terms of legal status, objectives, overall performance, and autonomy (the department of finance in the Ministry of Economy and Finance; the revenue agency with decentralized directorates; the customs agency; the Guardia di Finanza responsible for tax fraud investigation; Equitalia in charge of tax debt collection and the national Social Security Institute administering the collection of social security contribution and the payment of social benefits). Roles and responsibilities of this system of multiple bodies overlap and more coordination is needed. As noted by the expert study of the OECD (2016: 8), “all the arrangements in place among actors of the Italian tax administration are heavily focused on the operational level and there are no established processes involving all actors to periodically discuss the overall state of the tax system, identify immediate challenges and priorities, set overall goals and objectives, and/or resolve issues concerning coordination. In other words, there is no top-down strategic oversight involving all key actors and, as a result, no substantive over-arching strategy for improving the effectiveness of tax administration”. Beyond the issue of tax administration, from a broader viewpoint, the Italian approach adopted in trying to set up new financial relations is, up to today, characterized by adding complexity rather than avoiding it.

As the previous parts have shown, due to the complexity resulting from the delayed and desultory implementation of the system of fiscal federalism and financial relations, it is very difficult to give concrete evidence as to its actual functioning. A detailed look at the work of the Permanent Conference for the Coordination of Public Finance (hereinafter Permanent Conference) cannot help either. This body is the permanent advisory body tasked with the implementation of the reform. It is composed of representatives of the different institutional levels of government and has functions such as co-defining budget objectives (also with regard to tax pressure and indebtedness), advising on the equalization fund, monitoring the territorial entities’ compliance with set objectives and promoting the enforcement of convergence programs as well as managing a reward or sanctions system. The Permanent Conference was essentially set up because of the shortages of the intergovernmental relations’ system in Italy.

Coordination and cooperation across and within Italian governmental levels has never been constitutionalized. Subnational entities voice their interests and discuss policy implementation in a consultative Standing Conference for cooperation between the center, the regions, and the autonomous provinces. The Standing Conference is convoked at the request of the central government that also sets the agenda. This cooperation mechanism was established in 1983 and formalized by law no. 400/1988. Over time, this system gained significant political influence. However, it is limited by its inherent diversity, along Italy’s North–South divide and along party ideologies. Vertical bilateral coordination between the State and the single region is the preferred channel, even though it is, except in the case of special regions, improperly institutionalized and differently used from one region to another, not least because of the budgetary capacity each region has.

It is obvious that also the recent developments at the European level do significantly hamper the task of effectively balancing the inverted pendulum of the fiscal and financial system. In fact, the start of the implementation of the fiscal federalism reform coincided with the financial-economic crisis in the late 2000s (Ambrosanio et al. 2016). So did national austerity measures severely decrease the overall amount of transfers without providing any form of adequate compensation in terms of own taxes or other tax-revenue sources. Moreover, decentralized spending has been cut to ensure the respect of EU obligations and the regional tax autonomy has been frozen. Consequently, the vertical fiscal gap increased with more significant implications for the richer northern regions. A re-evaluation as to which public services must ultimately be equalized to which extent is work in progress, too. In sum, major equalizing efforts have been concentrated on health care, while other essential functions like education and social assistance have not been considered at all (Bordignon and Ambrosanio 2020).

In addition, the subnational dimension of financial autonomy continues to be vigorously constrained by the concrete functioning of the competence-allocation scheme, in ordinary times and ever more in extraordinary times such as the Covid-19 emergency. Both the delayed implementation of the reform and the extensive interpretation of the national competences have worsened the existing asymmetry between the expenditure and the revenue as far as subnational entities are concerned. This has also further deteriorated the condition of unaccountability. Such a reading of the national jurisdiction has had an impact also on the system of financing of special regions, though in their case the procedural guarantees coming with the principle of bilateralism allow for better, tailor-made negotiated solutions.

Notwithstanding the abovementioned shortcomings and bearing in mind the origins and the development of Italy’s territorial organization and socio-political peculiarities, governing Italy by means of coordinated but plural—and thus asymmetric—answers is the only possible way forward. Neither diversity nor asymmetry, within and across governmental levels, are, in the end, issues one can neglect. On the contrary, they are intrinsic to societal and territorial pluralism, in Italy and elsewhere. If managed well, they ultimately can contribute to balancing the effects stemming from an inverted governance pendulum.

As of early 2020, Italy’s system of fiscal federalism and financial relations continues to be called into question because of two systemic, long-standing reasons, and one reason linked to the challenges the pandemic bears. The two systemic ones are: First, political instability at the central level. On average, a legislature in Italy lasts 13 months. More than 66 governments have been in office since 1946 (as often, it depends on the counting method: The Draghi government, sworn in on 13 February 2021, is the 67th since the foundation of the Italian Republic, the 64rd since the ItConst came into force and already the 73rd since the end of fascism. Mario Draghi is the sixth head of government who was not elected from parliamentary ranks). Second, the lack of (coordinated) political pressure for change from the subnational level. Regions at last prefer having adequate resources without bearing the political costs associated with tax-raising. Therefore, any real fiscal decentralization that permits the instauration of an effective democratic control over subnational entities is far from being realized. Finally, the management of the Covid-19 pandemic challenges Italy’s system of intergovernmental (financial) relations in unprecedented ways.

9 Evaluating the Covid-19 Outbreak Phase: The Ultimate Stress Test

As elsewhere, in Italy in early 2020, Covid-19 was extremely stress-testing both the capacities and the capabilities of all actors of Italian regionalism, within and across governmental levels. The Covid-19 emergency phase officially started end of January 2020 with two Chinese visitors being tested positive in Rome, while its diffusion is linked to a 38-year-old Italian citizen being definitely hospitalized in Codogno, Lombardy, on 21 February 2020. After a very short time, the infections spread beyond all expectations, exceeding the Codogno area and involving not only the whole region of Lombardy but all the northern regions and the two autonomous provinces.

Interestingly, Lombardy, Emilia-Romagna, and Veneto, the three regions that have been among those being most heavily affected by Covid-19, are the ones that since 2017 have been asking for the transfer of additional powers from the center (pursuant to art. 116 par. 3 ItConst). In the proposals, the three regions advocate for assuming a large part of, if not all, the competences listed in art. 117 par. 3 of the ItConst, including, among others, health protection. Against the backdrop of the socio-economic challenges linked to the Covid-19 emergency, the negotiations between the central authority and these regions (but also others) as to the transfer of further powers will inevitably be re-shaped. Resumed negotiations, whenever possible, will call into question the instrument of differentiated regionalism, at least from a political viewpoint. At the national level, demands for re-centralizing the regional competence of health care have been voiced. However, as neatly pointed out by Bin (2020), the problem is that the public health care service works well in some regions and in others it does not, even though public spending is more or less the same. Better coordination would thus be the solution, not recentralization (Alber et al. 2021). Rather than ignoring the relative success of the regionalized health care sector, one should seriously address deficiencies in intergovernmental coordination (and financial relations). Ultimately, from a federal viewpoint, territorial actors know best the situation on the ground and the center’s task would be to efficiently monitor and coordinate the performance and quality of the delivery of public services throughout a country, in both ordinary and extraordinary times.

What Covid-19 teaches us about Italian regionalism is, in essence, that central, regional, and local authorities will have to seriously re-evaluate the question as to their respective governance and coordination capacities, as well as their capabilities, in the field of health care and beyond, not least because up to now procedural aspects in intergovernmental coordination, financial relations and data exchange have not been systematically approached and dealt with. The financial side of the scheme of differentiated regionalism, as well as the implementation of fiscal federalism (on which it should be grounded), are not yet sufficiently developed. For example, none of the preliminary agreements of 28 February 2018 between the regions Veneto, Lombardy, and Emilia-Romagna, and the center properly addresses the quantification of the resources needed to cover the expenses linked to the additional powers (such as health protection). The preliminary agreements, of political relevance only, have a duration of ten years, and they may be modified at any time by mutual agreement between the center and the respective region. Regarding financial resources, the preliminary agreements aim at setting up a State-region joint commission likewise the ones in the special regions. This body should define any details as to the allocation of resources or the revision of current sharing schemes by considering shared taxes and expenditure needs in relation to the exercise of the additional powers, and the criterion of standard costs and needs. From the viewpoint of virtuous regional financial management, the revised system of financial relations would not only have to address all the regional costs linked to the enhanced competence catalogue by making the region accountable for it, but also the costs linked to amply guaranteeing the essential levels of public services in key areas such as health, education, and social assistance. Only by such a virtuous financial management, a region could dispose of a budgetary capacity able to confront challenges also in inauspicious times. It is to be seen to what extent the mentioned regions will continue their negotiations over the transfer of additional powers, and if others will ever aim (and be permitted) to start negotiations (in more detail).

A closer look at how the Covid-19 Italian outbreak phase was handled clearly reveals the (structural) weaknesses inherent to Italy’s system of intergovernmental relations, in the health sector and beyond. The ItConst in its art. 32 safeguards “health as a fundamental right of the individual and as a collective interest” and it lists “health protection” as a concurrent legislative competence (art. 117 par. 3 ItConst), with the center determining general principles and the regions adopting detailed rules. As outlined earlier, the ItConst also attributes regulatory powers and administrative functions both to regions, local government, and second level local entities (art. 117 par. 6 and 118 par. 1 ItConst). According to this scheme, regional health services especially at the beginning of the emergency phase reacted differently to the challenges posed by Covid-19. For example, some southern regions imposed the obligation for persons arriving from a heavily affected region to self-isolate for 14 days. At the local level, some mayors ordered the closure of schools and public spaces, and they prohibited persons coming from heavily affected zones access to the municipality. To advert “localist drifts” (Vedaschi and Graziani 2020), the central government deprived measures taken by mayors of “any effect” if not consistent with the provisions laid down at the central level. The center also took legal actions against measures adopted by governors of a region. For example, when the governor of the insisted in closing schools in a period when in the Marches there was no single confirmed Covid-19 infection, the regional administrative court at the request of the council of ministers ultimately suspended the measure (that was adopted on 25 February 2020). However, on the same day of the judicial decision taken by the regional administrative court (27 February 2020), he again signed a regional ordinance to close the schools after having detected Covid-19 cases. He then could legitimately do so because of the occurrence of the factual circumstances and legal requirements envisaged in the decree law no. 6/2020 that provided for the adoption of containment measures in case of infections.

As elsewhere, the central government positioned itself along with its head, the then president of the council of ministers Giuseppe Conte, as the master of the crisis. After the declaration of the public health state of emergency on 31 January 2020 (with a time limit of six months), Conte in the period under examination signed several “Decrees of the President of the Council of Ministers” (hereinafter DPCM; they are of administrative nature) (see Ministero degli Affari Esteri 2020, with some of them available also in English; for the full list of legal responses to Covid-19 see Gazzetta Ufficiale 2020). In a chronological order, the DPCM of 08 March 2020 redefined the areas which were subject to restrictive measures of free movement by including larger areas in the most affected regions. The DPCM of 09 March 2020 extended the lockdown to all the Italian territory until 03 April 2020, while the DPCM of 11 March 2020 ordered the closure of all commercial and retail businesses except those providing essential services. As educational and cultural institutions, public events, and sport manifestations were already suspended nation-wide, both the public and commercial life came to a total halt. Under Italy’s quarantine measures, citizens were not allowed to move except from well-grounded work- or health-related reasons, and for getting basic supplies in their own neighborhood (grounds to be stated on a self-certification any person had to bring along). Special rules of self-isolation applied to persons suspected of having Covid-19 and several areas throughout Italy were also subject to even more restrictive measures such as the prohibition to enter or leave a municipality for any ground (except in case of an urgency). The DPCM of 22 March 2020, in addition, ordered the closure of all non-essential businesses and industries. The DPCM of 01 April 2020 extended the general shutdown of Italy’s public life and production system until 13 April 2020 and the DPCM of 10 April 2020 further specified the rules as to the lockdown with its extension until 03 May 2020. The DPCM of 26 April 2020 specified the rules for the so-called phase two, the re-opening, starting from 04 May 2020 (without explicitly considering any tailor-made solutions for territories that were barely affected by Covid-19). The closure of educational institutions until autumn 2020 was confirmed, and so were strict physical distancing as well as face mask wearing at work and in the public sphere; a plan as to slowly easing mobility restrictions (within one’s own region first, and across regions from 03 June onwards) as well as ideas as to a time-delayed resumption of work was also foreseen or voiced (with the re-opening of non-essential businesses and industries starting first, followed by the re-opening of commercial and retail businesses as well as restaurants and bars in the second half of May 2020). Especially from the end of April onwards, regional unrest as to the top-down management of phase two has been increasingly voiced. Some regions started to take actions by regulating or legislating (only South Tyrol did so!) on an earlier opening of certain activities, and sectors. A tug of war between the center and the respective region was thereforehas been initiated (Alber 2020).

All in all, the Italian legal response to Covid-19 was (inevitably) enacted in great haste, with some important constitutional issues and safeguards as to the rule of law that have been adjusted only along the way (Beqiraj 2020). Such adjustments concerned the relations between the central and subnational entities, and the role of the central government and its relations with the national parliament. On the one hand, the central government monopolized the emergency management without adequately involving the regions according to the principle of loyal cooperation, and the regions (and municipalities) thus acted on their own. From late February to the beginning of April 2020, regulatory and legal chaos with more than 250 measures made a clear understanding of the relationship between the measures taken at different governmental levels and their effects very difficult (e.g., regarding the right to do sports; see a list of all measures per region in Mallardo 2020; see also Simoncini 2020). On the other hand, the ItConst was of little help as it neither provides any clear procedural guarantees for the exercise of power in an emergency, nor any clear provisions as to the joint management of responsibilities. Indeed, the ItConst does not provide any extraordinary power-relation scenario except in case of a war. In such circumstances, art. 78 of the ItConst, prior to the authorization of the national parliament, enables the government to suspend fundamental rights and freedoms by means of a governmental decree having the same force of law. Within the Italian legal system, other acts that have force of law are the legislative decree (art. 76 ItConst) and the decree law (art. 77 ItConst). The first one, legislative decree, implies that the national parliament delegates the legislative function to the government after having established principles and guiding criteria (such a delegation is limited in time and for specific purposes only; for example, the central government got a “maxi-delegation” as to the implementation of the 2009 fiscal federalism reform). The second one, the decree law, can be used by the central government out of necessity and urgency, without a prior delegation from the national parliament. A decree law must, however, be converted by the national parliament into law within sixty days of its publication as it otherwise becomes void.

In the Covid-19 outbreak phase, in absence of clear constitutional provisions, the central government resorted to the possibility to decree-ruling. It basically seized all power from the regions based on the declaration of the public health state of emergency on 31 January 2020. This declaration is based on a statutory, not a constitutional provision: the Civil Protection Act 2018. This act has empowered the central government to adopt “any necessary measure” within the limits of the “general principles of the legal system and the European Union rules”. However, this act does not explicitly empower the central government to limit fundamental rights and freedoms. Therefore, on 23 February 2020 decree law no. 6 was issued (and converted into law on 05 March 2020). The decree law granted the competent authorities with the power to order “any appropriate restrictive measure”, and it allowed the central government to resort to several DPCM for the adoption of the lockdown measures. Regional authorities were scarcely consulted. On 25 March 2020, with the adoption of decree law no. 19, the central government clarified the relations and effects between the different measures that were taken at national and subnational level (Beqiraj 2020). It made clear that, in absence of measures taken at national level, subnational authorities may, within well-determined limits, introduce further restrictive measures to cope with specific emergency situations.

From the viewpoint of intergovernmental coordination, consultations with subnational authorities, however, continued to be rather limited. Next to the overall structural deficiencies of Italy’s intergovernmental relations (as earlier described in Section. 1 and 8), coordination across (and within) governmental levels was also difficult because of serious flaws in data collection and knowledge exchange. Even though Italy’s health information infrastructure is, in theory, considered to be optimal, its different territorial systems were badly interconnected and coordinated as to their preparedness and containment plans (outdated both at the national and the regional levels!) (Carinci 2020). This to varying degrees compromised the effectiveness of the responses to Covid-19, not per se decentralization. Decentralization, as argued in relation to the crisis management of other countries (Gaskell and Stoker 2020; Palermo 2020), would allow for the inclusion of localized capacity, and for the arrangement of multi-level structures into “working governance systems”. Rather than re-starting discourses on whether some competences should be recentralized, Italy should address a systematic review of the instruments promoting greater correlation and participation between the different institutional levels. At last, the key to success in solving any problem that transcends borders cannot but be the ability of governmental levels to relate to each other, in ordinary and extraordinary times. Therefore, a consistent chain of command as to the coordination of actions across levels of government is needed. Likewise, such a chain of command is needed to better understand the functioning of the (envisaged) rules of fiscal federalism and financial relations, not least because they will inevitably be revised against the backdrop of both the policy responses of the national and subnational governments to counteract the impact of Covid-19, and any (framework) conditions related to recovery programs of the EU. In such a scenario, Italy’s central authority will continue to play a pivotal role in balancing the ever more unstable inverted pendulum, and the risk of drifting toward further recentralization remains high.