Italy: Great Expectations

Published on February 12, 2021

Mario Draghi, the dream-technocratic prime minister for Italy, is likely to be sworn in with his cabinet by President Sergio Mattarella on Saturday and will easily pass a confidence vote in both houses of the Italian parliament next week, when he will also present his program.

Importantly, he will be starting with very broad political backing: support for him came from parties as disparate as the right-wing Lega of Matteo Salvini and the populist, left-wing 5-Star (although admittedly the two had been in government together for a while), as well as the more center-right and center-left parties.

That means that his government, which some say could run Italy until the next general elections in 2023, cannot be toppled by the withdrawal of any single party, as was the case with the two previous governments of Giuseppe Conte. This should give Draghi’s policies considerably more stability and longevity than those of technocratic governments of the past.

Like Mario Monti, appointed to save Italy from the fate of Greece at the height of the sovereign debt crisis in 2011, Draghi is a technocrat, which is often appreciated by markets, though rarely by voters.

But unlike Monti, who quickly became unpopular with Italians because he had to start his tenure with belt tightening reforms, Draghi will start with the gift of 209 billion euros from the EU recovery fund, which comes out to almost 13% of 2020 Italian GDP, which he will have to spend over the next years. His chances of being liked by the Italian electorate one might suspect are thus that much higher.

And with his ECB legacy as the man who saved the euro, Draghi also pulls enormous weight in Europe, and with his rather dovish views is likely to be a strong counterweight to the more hawkish EU north when the time comes to start withdrawing state support for companies and individuals in 2022 or 2023 as the eurozone economy slowly comes back to its feet.

Our understanding is that a (very) preliminary discussion of when to start pulling back such support will take place among eurozone finance ministers on Monday, though no decisions on any dates are to be taken. Firmer discussions on the timing of the withdrawal of fiscal stimulus in the eurozone are to take place in May and June, although chances are that EU budget borrowing limits will remain suspended through 2022 so as not to jeopardize the recovery.

Draghi is also likely to have an important influence on changes to the EU’s budget rules, the Stability and Growth Pact.

Now suspended for the pandemic, the Stability and Growth Pact will come under revision this year, with the aim of basing its rules more on observable metrics that the government can control, like spending benchmarks and debt, rather than on artificially calculated and often strongly revised indicators like the structural budget balance.

On the non-financial side, domestically, it remains to be seen what serious and much needed reforms of the labor market, administration, and judiciary Draghi will be able to push through, where so many before him have failed.

But as a technocrat at the head of a “national unity” government, with a broad “coalition” at his back, many of Italy’s parties may be tempted to let Draghi do that dirty work for them over the next two years, to then benefit from the changes as the economy starts to expand again when they next bid for power in 2023.

Of most immediate concern, Draghi realizes his success will depend crucially on the speed of vaccinations in Italy — not so great so far — and has already said he would make that a priority.

His “coalition” may be happy to let him take the fall in case he fails, and if he succeeds, they expect he would probably not try to compete against them in the 2023 elections. On that count, we shall see.

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