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Mario Draghi uses his position as Italian prime minister to offer the only thing he could never evoke when he was chief European Central Bank: massive fiscal stimulus.
In his first months in office, he is already on track to save more than 70 billion euros ($ 84 billion). Combined with stimulus measures taken by the previous government, he adds up to more than € 170 billion to protect the country’s families and businesses from the pandemic. The government says this will push this year’s budget deficit to 11.8% of government output, making it the largest stimulus effort in Europe.
Draghi is convinced that Europe’s economies will be stronger in the long run if the tax and monetary authorities work together to bring them back to health as soon as possible. While this means rising massive short-term debt, the alternative could be a half-life cycle and anemic expansion that would leave Italy and the European Union more and more behind the US and China.
Coming back up
Italy’s GDP will grow faster than many neighbors, but Draghi still has the most ambitious stimulus program
Source: International Monetary Fund, World Economic Outlook Database, Italian Ministry of Finance
“Draghi himself said it was a gamble,” said Veronica De Romanis, a professor of European economics at Luiss University in Rome. “But it’s the only chance we have, the alternative is austerity.”
This integrated strategy is the most daring manifestation of a major shift in Europe’s fiscal philosophy since responding to the austerity-driven sovereign crisis of ten years ago. Draghi’s determination to grow as the mastermind of his policy strengthens Italy’s place with France in removing potential spending constraints and taking advantage of the market’s willingness to support economic recovery.
Read more: France leads campaign for fiscal stimulus in Europe
The additional spending will push the Italian debt close to 160% of production this year, even higher than the 159.5% reached after the devastating impact of the First World War. The International Monetary Fund estimates that Italy’s economy will expand by 4.2% this year, faster than the euro area average. But Draghi’s deficit plans are more aggressive than those of any of his European colleagues.
“Judging by yesterday’s eyes, it would be very worrying. Today’s eyes are very different, because the pandemic made it legitimate to create a big debt “, Draghi said during a press conference in Rome, on Friday. “Debt is good if you can put a company back on the market and allow it to support itself.”
10-year Italian bond yields stood at 0.747% on Friday, after closing at a record high of 0.456% in February, while investors continue to pay the French government to take their money for a decade.
With European tax rules suspended until 2022, the door is wide open for countries looking to provide large-scale incentives, and Italy is set to receive more aid when around € 200 billion in European recovery funds begin to come to an end. this year.
While disputes within Poland’s ruling coalition have threatened to delay ratification of the plan, European Commission Vice President Valdis Dombrovskis said on Friday that the EU was in the “final stage” of preparations for the release of funds, although a handful of countries still had work to do. “For a large majority of Member States, the plans are well advanced,” he told a news conference in Brussels after talks with EU finance ministers.
Draghi made a name for himself when he was head of the European Central Bank with the famous commitment to do “everything necessary” to save the euro, signaling to markets that it is ready to push monetary policy to its limits.
The US example
Convinced that the region was facing the threat of deflation, Draghi led the ECB on a stimulus path that includes several unconventional instruments from negative interest rates to quantitative easing that were previously considered inconsistent in the context. euro area, not least against the background of German dissent.
Tabhi’s nice approach took hold of the Federal Reserve in Washington, but left the eurozone unleashed by disagreements until he left the ECB in late 2019. He promoted the last round of bond purchases on the public opposition of central bankers in Washington. Germany, France and the Netherlands, leaving scars that his successor, Christine Lagarde, still has.
While leading the engine of monetary policy at the ECB, Draghi sometimes expressed frustration that governments are not doing more with fiscal policy to support demand.
Now that he has control of the fiscal levers in the EU’s third largest economy, he is helping to strengthen the bloc in line with the momentum of the advanced world to prioritize extraordinary incentives as a central response of governments to a crisis. exceptional economic. In the US, this approach has been reinvigorated this year, with direct payments to authorized citizens since the inception of President Joe Biden’s administration.
As he presented plans for another round of lending on Friday, a reporter asked him if he had sense that another 40 billion euros were going too far. The prime minister’s response suggested that he had embraced his fiscal game, he was still doing well.
“I don’t think if you were 40 you wouldn’t have shivered instead of 40,” he said. And then he added: “Growth is the key criterion: it must be sustainable growth.”
– With the assistance of Craig Stirling, John Follain, Viktoria Dendrinou and Samuel Dodge