Economy

Saving Italy Could Be Harder Than Saving The Euro

Analysis 22 February 2021
Saving Italy Could Be Harder Than Saving The Euro

‘Super Mario’ could be the right man for Italy to weather the current storm and tackle some of the country’s historical vulnerabilities. The EU, as a whole, can benefit from the new Italian government, too. However, high expectations could turn into short-lived dreams given Italy’s fragmented political context and the resistance this new government will face. Draghi must be ambitious, and if he is to implement his reform agenda, his government will need to hold out until the end of the legislative term (2023).

President Sergio Mattarella tasked Mario Draghi to form a new government on 3 February. The former President of the European Central Bank (ECB) has secured broad support across the Italian political spectrum following two rounds of talks with all parties. On 17 February, the new cabinet won a vote of confidence in the Italian Senate with 262 votes in favour. Almost all political parties support the new government: The far-right League, the centre-right Forza Italia, and the three main centre-left parties Democratic Party, Italia Viva and Free and Equal. Even the anti-establishment Five Star Movement (the largest political group in the parliament) lent its support – with the exemption of 15 members who voted against the new cabinet. Only the nationalist Brothers of Italy is out of the governmental coalition. Today, Mario Draghi will win the vote of confidence in the Chamber of Deputies.

Who is Mario Draghi?

Celebrated as the man who ‘saved the euro’, Draghi has a substantial history of contributing to Italian economic policy before becoming ECB president in November 2011. Appointed in 1991 as Italy’s Director General of the Treasury, he played a crucial role in the wave of privatisations of Italian public enterprises. This helped reduce public debt by nine percentage points and move Italy towards adopting the euro. In 2005, Draghi became Governor of the Bank of Italy until he followed Jean-Claude Trichet at the ECB’s helm.

A high-profile government

Mattarella’s appointment of Draghi was a call on all political forces to put aside their rivalries and back the formation of a “high-profile government” that is strong enough to address the challenges related to the COVID-19 pandemic and the management of European funds from the Recovery and Resilience Facility (RRF). The new cabinet includes both technocratic and political ministers. The former will be directly in charge of crucial domains related to the Italian Recovery and Resilience Plan (RRP), emphasising the digital and green transitions. For the prestigious post of Minister of Economy and Finance, Draghi will rely on a non-political figure: Director General of the Bank of Italy and long-time ally Daniele Franco.

Unexpected support

Most of the political parties welcomed the new government, whose broad political consensus is based on three pillars: Europeanism, Atlanticism and environmentalism. Surprisingly, the Five Star Movement and the League, which for years represented the Eurosceptic voice (going as far as advocating withdrawing the country from the eurozone), granted their support to the ‘high-profile government’ because of several political and pragmatic reasons.

First, with the exemption of the League, most of the parliamentary forces (including the Five Star Movement) were not keen on having general elections, given the current crisis and the likely victory of a right-wing coalition (the League, Forza Italia and Brothers of Italy). Second, it would have been incredibly complicated to organise elections due to the pandemic. Third, each party has claimed specific flagship policies of the new government’s agenda as their own. And last but certainly not least, many politicians want to take advantage of being associated with a government that will ‘distribute’ the money coming from the RRF (Italy’s share amounts to €200 billion).

The two Marios: Not so alike?

Draghi shares the ‘EU technocrat’ profile with Mario Monti, who was also prime minister at the height of the sovereign debt crisis between 2011 and 2012. As Draghi is today, Monti was welcomed as a sort of national saviour, both at home and across Europe. The highly and widely esteemed economist with extensive knowledge of the EU, free from political dynamics, was deemed capable of turning Italy around and tackling much-needed reforms. Nevertheless, Monti became a target of political sniping: the public narrative surrounding him was that of an ‘EU-imposed technocrat’ who ‘secures’ public finances through austerity policies.

Contrary to what the Monti government experienced between 2011 and 2012, the current context is more favourable – at least in the short and medium term – for several reasons. First, financial markets are not (yet) attacking Italy’s debt sustainability, thanks to the ECB’s backstop granted since the beginning of the pandemic. As such, Draghi will avoid being labelled as a ‘technocrat’ who imposes austerity to secure Italy’s public finances. On the contrary, Draghi is charged with implementing expansionary policies under the Next Generation EU (NGEU) recovery package.

Second, Draghi’s cabinet comprises independent experts and political figures from all major parties, whereas Monti’s government was fully technocratic. Today, political representatives are taking direct responsibility for their government’s actions, which will reduce the extent to which Draghi is exposed to political sniping.

Finally, unlike Monti in 2011, Draghi already experienced operating in a more complex ‘political’ environment during his time at the ECB. He overcame major differences and resistance within the Governing Council and among governments, to introduce highly controversial measures to contain and eventually overcome the euro crisis.

A potentially short honeymoon

Despite these differences, the new government’s honeymoon phase might still end up being a short-lived dream. It will face crucial challenges, and some choices will be difficult to sell to the public. Italy’s socio-economic situation is dramatic, and unemployment may rise in the next few months. If that is the case, liquidity support to enterprises might have to be reduced and only targeted at those deemed able to survive in a post-COVID-19 world. The effects of the pandemic are still massive in Italy, and the vaccine rollout is going slower than expected. Additionally, the two Eurosceptic parties’ support must be understood as an opportunistic political move. The League might decide at some point to withdraw its support for the Draghi government and revert to its strong anti-EU rhetoric.

Italy’s success is important for the EU

The EU’s recovery will depend greatly on Italy’s recovery. The Union’s third-biggest economy has been hit severely by the pandemic. GDP fell by 8.8% in 2020, and its recovery will hinge on its ability to seize the RRF’s opportunities. In other words, Italy’s success would be the EU recovery plan’s success.

The new government will need to present its national recovery plan to the Commission by 30 April. Mario Draghi’s cabinet will revise the first version drafted by the previous government (led by Giuseppe Conte), which also explains the implementation of the plan. For the latter, Mario Draghi will mostly rely on non-affiliated ministers, with a crucial role for Daniele Franco.

However, historical vulnerabilities must be tackled if the country is to make the best use of European financial support. Italy’s economy has been underperforming in terms of GDP and productivity growth since the 1990s. This is largely due to it being dominated by micro and small enterprises specialised in light industries, which are not technology-intensive. In addition, it is burdened by a complicated business environment and inefficient administration. These factors must be addressed if Italy is to no longer be the ‘sick man of Europe’.

Mario Draghi needs ambition and time

The new government represents Italy’s chance to tackle some of its main economic deficits – provided that it defines and implements an ambitious agenda. Draghi has already set three priorities, all strongly linked to the implementation of the RRP: a triple reform that involves public administration, civil justice and the tax system. This could put Italy in the right direction. Nevertheless, a more comprehensive approach will be needed: additional reforms must boost competition by incentivising innovation and create better conditions for ‘doing business, coupled with an industrial policy to mobilise private and public investments in research and development.

It might be a while before these reforms take effect. The government should, therefore, adopt a long-term perspective until 2023, the end of the current legislative term. For that, Draghi will have to overcome resistance within his coalition, as many seem to prefer a shorter lifespan for his government (i.e. around one year).

Addressing Italy’s structural deficiencies will affect vested interests, and so popular support may fade over time. Mario Draghi must keep building political consensus to implement his ambitious reform agenda. It will be in the EU27’s interest to strongly support his efforts, as his government’s success and the EU’s successful exit from the COVID-19 crisis are two sides of the same coin.

The article was republished from the European Policy Center. Author: Francesco De Angelis is Programme Assistant for the Europe’s Political Economy programme.

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