ROME – Mario Draghi, the former president of the European Central Bank, became a hero for financial markets and the European Union after he defused the continent’s debt crisis by promising to do “whatever it took” to save the euro.
That can be the easy part. Draghi must now show that he has everything he needs to become Italy’s next prime minister, convince the country’s rebel parties to support him and reverse a long economic decline in the depths of the worst pandemic in a century.
The future of the euro may once again depend on how Draghi fares. The eurozone’s third largest economy, after Germany and France, is also its biggest long-term problem. Italy’s debts are high, its growth is chronically low and its society is increasingly frustrated.
Since Brexit, the EU’s political establishment has taken a nervous look at Italian public opinion, which used to see Europe as the answer to Italy’s problems, but now sometimes sees the EU and the euro as part of the problem. Draghi, who believes in the European project, will try to convince Italians that their problems are homemade.
Fixing Italy’s economy is a puzzle that has challenged the best efforts of many reputable technocrats and reformist politicians over the past quarter century.
“Awareness of the emergency implies responses that are up to the challenge,” Draghi said on Wednesday after Italy’s head of state, President Sergio Mattarella, gave him the task of forming a government. “Winning the pandemic, completing the vaccination campaign, offering answers to citizens’ daily problems, reliving the country, are the challenges that lie ahead.”
First, however, Draghi must persuade the majority of lawmakers in a fragmented parliament to support him. So far, only the center parties have spoken publicly in support, despite Mattarella’s call for unity between party divisions. To become prime minister, Draghi will need the support of the populist 5 Star Movement or the nationalist League. Both parties have long complained about Italy’s habit of naming governments led by economists and technocrats like Draghi.
Financial markets, however, welcomed the appointment of the former head of the ECB, known as “Super Mario”. The Milan stock market rose, and the risk premium for Italian government bonds compared to German superinsurance bonds fell to the lowest level in nearly five years.
Draghi’s main assets, in addition to his high personal reputation, include more than 200 billion euros, equivalent to $ 240 billion, in economic recovery funds promised to Italy by the EU. Europe’s huge recovery fund was created last year mainly because Berlin, Paris and other major EU capitals feared that the Covid-19 pandemic could lead to a lasting economic depression in Italy and other parts of southern Europe. Less than a decade after the economic pain of the eurozone debt crisis, such a result could be politically explosive for the bloc, EU leaders fear.
Fragmented
Mario Draghi needs more support to become Italy’s prime minister.
Italy’s lower house of parliament, current seats by 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
Forza Italia
(center-right)
33
Brothers from italy
(far right)
191
5 star movement
(eclectic)
28
Italia Viva
(centrist)
93
Democratic Party
(center-left)
50
Mixed group
(eclectic)
91
Forza Italia
(center-right)
33
Brothers from italy
(far right)
191
5 stars
Movement
(eclectic)
28
Italy
Alive
(centrist)
93
Democratic
Party
(center-left)
50
Mixed
group
(eclectic)
91
Forza
Italy
(center-right)
33
Brothers
from Italy
(far right)
33
Brothers from italy
(far right)
91
Forza Italia
(center-right)
28
Italia Viva
(centrist)
50
Mixed group
(eclectic)
191
5 star movement
(eclectic)
93
Democratic Party
(center-left)
But Italy’s last government failed to reach an agreement on how to use the money, which contributed to its collapse earlier this month. Other EU capitals, having agreed to the funding, looked suspiciously at the political crisis in Rome and are likely to be relieved if Draghi manages to take control.
Draghi argued that EU funds, if used for investments that stimulate growth, could be the key to reviving the Italian economy and making its debts sustainable.
“We have the extraordinary European resources at our disposal. We have the opportunity to do a lot for our country ”, said Wednesday.
If Draghi fails to find enough support in Parliament, Italy is probably preparing for early elections. Most of the political class wants to avoid this in the middle of Covid-19. Mr. Mattarella warned that the elections could also delay crucial actions on the economy and the pandemic for months.
Political Crisis in Italy
Italy’s most deeply rooted economic problems include the lack of productivity growth since the 1990s. Economists and entrepreneurs point to many factors that hinder innovation and productive investment: a tangle of bureaucracy and authorizations, complex and contradictory laws, a judicial system sclerotic, outdated and underfunded universities, public sector corruption, political instability that prevents long-term policy making, poverty and underdevelopment in southern Italy, and a commercial sector with an excess of small family businesses, usually run by elderly and risk averse.
Italy’s economy contracted almost 9% in 2020, one of Europe’s worst recessions, with the impact of Covid-19 and long blockades. Its national debt is increasing to 160% of gross domestic product, the EU’s second largest proportion, after Greece.
The last time a technocrat led Italy, the results were mixed. Mario Monti, a respected economist and a former EU official, is remembered for inflicting painful fiscal austerity during the eurozone crisis. Monti’s harsh policies may have helped restore part of Italy’s credibility with the EU bond markets and authorities, but its tax increases have also deepened Italy’s recession, while its structural revisions have done little to improve Italy’s growth performance. Italy in the long run. The experience turned many Italian voters against the government of technocrats and helped fuel the growth of populist anti-establishment parties.
Draghi is well aware of the skeptical view of Italians towards governments led by technocrats and has been reluctant to enter the political fray, according to people familiar with his thinking. But after Prime Minister Giuseppe Conte’s government left the collapse this month, Italy had few other reliable leaders to turn to.
Write to Marcus Walker at [email protected] and Giovanni Legorano at [email protected]
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