Italy and Europe, look out for Mario Draghi to resolve another crisis

The future of the euro may again depend on the way Mr. Draghi sails. The eurozone’s third largest economy after Germany and France is also its biggest long-term problem. Italy’s debt is high, its growth is chronically low and its society is becoming increasingly frustrated.

Since the Brexit, the EU’s political institution has cast a nervous eye on Italian public opinion, which used to see Europe as the answer to Italy’s misery, but is now sometimes seen by 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 homemade.

The solution of Italy’s economy is a mystery that has defied the best efforts of many valued technocrats and reformist politicians over the past quarter century.

“Emergency awareness holds answers to the challenge,” he said. Draghi said on Wednesday after the head of state of Italy, President Sergio Mattarella, instructed him to form a government. “The challenge we face is to defeat the pandemic, to complete the vaccination campaign, to provide answers to the daily problems of the citizens, to revive the country.”

First, Mr. Draghi, however, persuaded a majority of lawmakers in a fragmented parliament to support him. So far, only centrist parties have received public support, despite Mr. Mattarella’s call for unity over partisan division. To become prime minister, Mr. Draghi needs the support of the populist 5-star movement or the nationalist league. Both parties have long been against Italy’s habit of appointing governments led by economists and technocrats such as Mr. Draghi.

However, financial markets welcomed the appointment of the former ECB chief, known as ‘Super Mario’. The stock market in Milan has risen, and the risk premium on Italian government bonds compared to super-safe German bonds has fallen to its lowest level in almost five years.

The most important assets of mr. Draghi, in addition to his high personal reputation, includes the more than 200 billion euros, equivalent to $ 240 billion, in economic recovery funds promised to Italy by the EU. Europe’s massive recovery fund was built last year, especially as 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’s debt crisis would be politically explosive for the bloc.

But Italy’s last government could not agree on the use of the money, and contributed to its collapse earlier this month. Other EU capitals, which have agreed to the funding, have looked askance at the political crisis in Rome and are likely to be relieved if Mr. Draghi manages to take it over.

Mr. Draghi argued that EU funds, if used for growth-enhancing investments, could be the key to reviving the Italian economy and sustaining its debt.

‘We have extraordinary European resources. We have the opportunity to do a lot for our country, “he said on Wednesday.

As mnr. If Draghi cannot find enough support in parliament, Italy is likely on its way to a quick election. Most of the political class wants to avoid this in the midst of the Covid-19. Mr. Mattarella warned that elections could also delay important actions for the economy and the pandemic months.

Italy’s deep – rooted economic problems include a lack of productivity growth until the 1990s. Economists and businessmen point to many factors that hold back innovation and productive investment: a thicket of bureaucracy and permits, complex and conflicting laws, a sclerotic court system, underfunded and outdated universities, corruption in the public sector, political instability that hinders policy-making. for the long-term, poverty and underdevelopment in the south of Italy, and a business sector with a large number of small family businesses, regularly managed by older and riskier coaches.

Italy’s economy shrank by almost 9% in 2020, one of the worst setbacks in Europe, due to the impact of the Covid-19 and prolonged closures. Its national debt is rising towards 160% of gross domestic product, the EU’s second highest ratio to Greece.

The last time a technocrat led Italy, the results were mixed. Mario Monti, a respected economist and former EU official, is remembered for inflicting painful fiscal austerity during the eurozone crisis. Mr. Monti’s difficult policies may have helped restore Italy’s credibility with the bond markets and the EU authorities, but its tax increases have also deepened the recession in Italy, while its structural overhaul has little improved Italy’s long-term growth performance. The experience challenged many Italian voters against the rule of technocrats, and fueled the growth of populist, anti-establishment parties.

Mr. Draghi is well aware of the Italians’ skeptical view of governments led by technocrats, and according to the people familiar with the thinking, they were reluctant to enter the political struggle. But after the departure of Prime Minister Giuseppe Conte’s government this month, Italy had few other credible leaders.

Write to Marcus Walker at [email protected] and Giovanni Legorano at [email protected]