Luis Garicano has an amazing post on “one of the dumbest fiscal policies in recent memory.” Launched in Italy during COVID by Prime Minister Conte, the “Superbonus” scheme subsidized 110% of housing renovation costs. Now if one were to use outdated, simplistic, Econ 101 type reasoning one would predict that such a scheme would be massively costly not only because people would rush to renovate their homes for free but because the more expensive the renovation on paper the bigger the bonus.

The proponents of the Superbonus, most notably Riccardo Fraccaro, were however, advocates of Monetary Monetary Theory so deficits were considered only an illusory barrier to government spending and resource constraints were far distant concerns. Italy still had to meet EU rules, however, so the deficit spending was concealed with creative accounting:

rather than direct cash grants, the government issued tax credits that could be transferred. A homeowner could claim these credits directly against their taxes, have contractors claim them against invoices, or sell them to banks. These credits became a kind of fiscal currency – a parallel financial instrument that functioned as off-the-books debt (Capone and Stagnaro, 2024). The setup purposefully created the illusion of a free lunch: it hid the cost to the government, as for European accounting purposes the credits would show up only as lost tax revenue rather than new spending.

In MMT terms, Fraccaro and his team effectively created money as a tax credit, putting into practice MMT’s notion that a sovereign issuer’s currency is ultimately a tax IOU​.

So what were the results? The “free renovation” scheme quickly spiraled out of control. Initially projected to cost €35 billion, the program ballooned to around €220 billion—about 12% of Italy’s GDP! Did it drive a surge in energy-efficient renovations? Hardly. Massive fraud ensued as builders and homeowners inflated renovation costs to siphon off government funds. Beyond that, surging demand ran headlong into resource constraints. Econ 101 again: in the short run, marginal cost curves slope upward.

Construction costs sharply increased – the Construction Cost Index grew by roughly 20% after the pandemic and surged another 13% after September 2021, with the Superbonus directly responsible for about 7 percentage points of that rise, according to Corsello and Ercolani (2024). The price of setting up scaffolding, an essential first step for renovation, increased by 400% by the end of 2021.

…Even the program’s environmental benefits came at an astronomical cost – any calculation will yield far north of €1,000 per ton of carbon saved (versus an ETS Carbon price of around €80 per ton).

Moreover, as Garicano trenchantly notes once started the program’s structure made it fiendishly difficult to stop:

The benefits were concentrated among vocal constituencies: homeowners getting renovations, the environmental movement, and contractors seeing booming business. The costs, while enormous, were spread across all taxpayers and pushed into the future through the tax credit mechanism. No government—leftist, technocratic, or right-wing—was able to resist its logic. Parliament consistently pushed back against efforts to limit its scope, even after fraud estimates hit €16 billion. As prime minister, Mario Draghi, despite publicly criticizing the program for tripling construction costs, could not halt it — in fact, his initial action was to simplify access to it. When his government attempted to curb abuse, the Five Star Movement reacted with anger, and even modest controls on credit transfers were fought. By 2023, Giorgia Meloni’s right-wing government faced the same constraints—industry groups protested, coalition partners balked.

In normal times, the EU might have intervened to curb the reckless deficit spending—everyone knew what was going on, even if the numbers were temporarily kept off the books. But during COVID, the EU turned a blind eye, and the ECB kept interest rates low.

In fact, Garicano argues that the Superbonus story is merely the most blatant example of deeper systemic issues which now trouble the entire EU:

This erosion of discipline isn’t limited to Italy. France’s deficit has drifted to 6.1% of GDP. Spain reversed its post crisis pension reform right around the time Italy was passing the Superbonus, with much larger negative consequences for fiscal sustainability. In a world where the ECB will always intervene to prevent bond market pressure and Brussels cannot credibly enforce fiscal rules on large states, sustainable fiscal policy becomes politically almost impossible.

The very mechanisms designed to protect the euro may now be undermining it.