ROME— Mario Draghi, the former head of the European Central Bank, has become a hero for the financial markets and the European Union after defusing the continent’s debt crisis by promising to do “everything necessary” to save the euro.
This may turn out to be the easy part. Mr Draghi must now show that he has what it takes to become the next prime minister of Italy, to persuade the country’s troubled parties to support him and to reverse a long economic decline in the depths of the worst pandemic of the last century.
The future of the euro could again depend on how Mr Draghi behaves. The third largest eurozone economy after Germany and France is also the biggest problem in the long run. Italy’s debts are high, its growth is chronically low and its society is increasingly frustrated.
Since Brexit, the EU’s political institution has taken a nervous look at Italian public opinion, which used to see Europe in response to Italy’s troubles, but now sometimes sees the EU and the euro as part of the problem. Mr Draghi, a believer in the European project, will try to convince Italians that their problems are at home.
Fixing the Italian economy is a puzzle that has defied the best efforts of many well-regarded technocrats and reform politicians in the last quarter of a century.
“Awareness of the emergency involves challenges that are up to the challenge,” Draghi said on Wednesday after Italian President Sergio Mattarella gave him the task of forming a government. “Defeating the pandemic, completing the vaccination campaign, providing answers to the daily problems of the citizens, invigorating the country, are the challenges that lie ahead.”
First and foremost, however, Mr Draghi must persuade the majority of parliamentarians in a fragmented parliament to support him. So far, only centrist parties have come out in public support, despite Mr Mattarella’s call for unity between partisan divisions. To become prime minister, Mr Draghi will need the support of the 5-star populist movement or the Nationalist League. Both parties have long been opposed to Italy’s habit of appointing governments led by economists and technocrats, such as Mr Draghi.
However, the financial markets welcomed the appointment of the former head of the ECB, known as “Super Mario”. The Milan stock market has risen, and the risk premium on Italian government bonds compared to German overinsurance bonds has fallen to its lowest level in almost five years.
Mr Draghi’s main assets, in addition to his high personal reputation, include more than € 200 billion, the equivalent of $ 240 billion, in economic recovery funds promised to Italy by the EU. Europe’s massive recovery fund was built last year, mainly because Berlin, Paris and other key EU capitals feared the Covid-19 pandemic could lead to a lasting economic depression in Italy and other parts of Southern Europe. . EU leaders feared that less than a decade after the economic pain of the eurozone debt crisis, such an outcome could be politically explosive for the bloc.
Fragmented
Mario Draghi needs more support to become Italy’s prime minister.
The lower house of the Italian parliament, the current seats of the party and support for or against Mario Draghi
191
5 star movement
(eclectic)
28
Italia Viva
(centrist)
93
democratic party
(center-left)
50
Mixed group
(eclectic)
91
Come on Italy
(center-right)
33
Brothers of Italy
(far right)
191
5 star movement
(eclectic)
28
Italia Viva
(centrist)
93
democratic party
(center-left)
50
Mixed group
(eclectic)
91
Come on Italy
(center-right)
33
Brothers of Italy
(far right)
191
5 stars
Circulation
(eclectic)
28
Italy
Alive
(centrist)
93
Democratic
Part
(center-left)
50
Mixed
group
(eclectic)
91
Power
Italy
(center-right)
33
Brothers
from Italy
(far right)
33
Brothers of Italy
(far right)
91
Come on Italy
(center-right)
28
Italia Viva
(centrist)
50
Mixed group
(eclectic)
191
5 star movement
(eclectic)
93
democratic party
(center-left)
But Italy’s latest government could not agree on how to use the money, contributing to its collapse earlier this month. Other EU capitals, after agreeing on funding, have watched the political crisis in Rome with concern and will be relieved if Mr Draghi manages to take control.
Mr Draghi said EU funds, if used for growth-boosting investment, could be key to reviving Italy’s economy and making its debt sustainable.
“We have extraordinary European resources at our disposal. We have the opportunity to do a lot for our country “, he said on Wednesday.
If Mr Draghi cannot find enough support in parliament, then Italy is probably heading for quick elections. The majority of the political class wants to avoid this in the middle of Covid-19. Mr Mattarella warned that the election could also delay crucial actions on the economy and pandemic for months.
Italy’s political crisis
Italy’s deep economic problems include a lack of productivity growth dating back to the 1990s. Economists and business people point to many factors hindering innovation and productive investment: a lot of bureaucracy and permits, complex and contradictory laws, a sclerotic judiciary. , underfunded and outdated universities, public sector corruption, political instability hindering long-term policy making, poverty and underdevelopment in southern Italy, as well as a business sector with a small number of small family businesses, often run by aging founders and risk aversion.
Italy’s economy contracted by almost 9% in 2020, one of the worst crises in Europe, due to the impact of Covid-19 and long-term blockages. Its national debt rises to 160% of gross domestic product, the EU’s second largest ratio after Greece.
The last time a technocrat ruled Italy, the results were mixed. Mario Monti, a respected economist and former EU official, is remembered for causing painful fiscal austerities during the eurozone crisis. Mr Monti’s tough policies could have helped restore some of Italy’s credibility to EU bond markets and authorities, but its tax hikes have also deepened Italy’s recession, while its structural revisions have not done much to improve performance. Italy’s long-term growth. The experience turned many Italian voters against the government by technocrats and helped fuel the growth of anti-establishment populist parties.
Mr Draghi is keenly aware of Italians’ skeptical views of technocratic-led governments and has been reluctant to enter the political struggle, according to people familiar with his thinking. But after the government of Prime Minister Giuseppe Conte who left collapsed this month, Italy had few other credible leaders to turn to.
Write to Marcus Walker at [email protected] and Giovanni Legorano at [email protected]
Copyright © 2020 Dow Jones & Company, Inc. All rights reserved. 87990cbe856818d5eddac44c7b1cdeb8