Super Mario Rides to Italy’s Rescue Armed With Prestige and EU Funds

After being asked to run Italy, Mario Draghi took less than a week to turn the political system on its head and boost the country’s standing in financial markets. In many ways, that’s more than outgoing Prime Minister Giuseppe Conte managed in better than two years on the job.

How has he pulled it off? “He’s Draghi,” says one official involved in talks to cement a governing coalition who asked not to be named. The former head of the European Central Bank enjoys such prestige that no politician dares to challenge him openly—at least not for now.

Dubbed Super Mario by the media for his no-holds-barred defense of the euro during his eight years at the helm of the ECB, Draghi is helping to forge a rare political consensus in Italy, where the average duration of a government is less than 14 months. Here are two reasons politicians are making nice: Draghi has €209 billion ($254 billion) in European Union stimulus funds to turn around the country’s ailing economy and he won’t be running for office in the next general election.

That’s an appealing combination for markets, too. Italian stocks and bonds have rallied since Draghi accepted a mandate from President Sergio Mattarella to form a new government on Feb. 3. The spread between yields on 10-year Italian government bonds and comparable German debt, a key measure of sovereign risk, narrowed to its lowest level in more than five years, while the benchmark stock index recently touched a one-year high.

The stakes couldn’t be higher for Italy. The coronavirus pandemic has left more than 90,000 dead and caused the economy to shrink almost 9% last year. The ratio of government debt to gross domestic product is approaching 160%, among the highest in the world. The ECB’s bond-buying program has kept a lid on Italy’s borrowing costs so far, but that support won’t last forever, particularly if the rest of Europe rebounds strongly.

Few people know better than Draghi that the woes of the Italian economy go far beyond the ravages of Covid-19. The country was already headed for a recession before the pandemic, after a quarter century of stagnation that saw it constantly lose ground against its peers in the region. The list of culprits is by now familiar: a byzantine bureaucracy, endemic corruption, lack of innovation, and companies that almost never grow big enough to compete on the world stage. A dwindling population, the second-lowest share of working women in Europe, and a lack of skilled immigration have only compounded the country’s decline.

For decades, fragile governing coalitions refused to tackle the deep roots of this economic failure. So whenever the country finds itself on the verge of collapse, the solution has always been the same: Call in the technocrat.

It happened in the early 1990s when Bank of Italy Governor Carlo Azeglio Ciampi was drafted as prime minister, and again at the height of the sovereign debt crisis in 2011 with Mario Monti, who’d spent a decade at the European Commission. Then in 2018 rival populist parties tapped Conte, a law professor at a university in Florence, to reconcile their agendas.

Draghi is especially wary of the precedent set by Monti, who had to raise taxes and reform the pension system to stabilize the country’s wobbly finances. The measures proved deeply unpopular, and Italy’s politicians, who’d initially welcomed him as a savior much like they are now doing with Draghi, soon turned on him.

The former ECB president has a very different hand to play, though. Austerity is no longer in fashion, and EU budget rules have been suspended because of the pandemic. Draghi has said his main priorities will be the fight against Covid, ramping up Italy’s halting vaccination program, and revising the list of investments to be paid for with EU recovery funds. One question mark is to what degree, if at all, he will continue Conte’s policy of state intervention in the economy.

Draghi has also promised to pay close attention to Italy’s schools. The country regularly trails other developed countries in international education rankings. Italian children have lost more school days than any others in Europe because of lockdowns.

As prime minister, Draghi will also be able to pursue a longtime goal of his: a common budget for the euro area. That would make Italy more attractive in the eyes of investors, who would take comfort from the knowledge that its public finances were backstopped. But it will be a tough sell with better-off European countries that don’t want to end up having to pick up the tab for Italy’s problems.

In a way, Draghi has already saved Italy once. His 2012 assurance that the ECB would do “whatever it takes” to protect the euro from investors betting on the common currency’s imminent breakup is the stuff of legend in finance circles. It also cemented his image as an effective, sometimes even ruthless, leader capable of steamrolling opposition to his policies.

What remains to be seen is whether the powers of persuasion he displayed in hushed conference rooms will translate to the often rambunctious Italian Parliament—not to mention the public. Is Draghi, who has no social media presence, going to take his message directly to Italians using Twitter or live videos on Facebook as his predecessor did?

In Rome, many of the political leaders who’ve met Draghi have gone out of their way to strike an accommodating tone and soft-pedal the issues that caused clashes during Conte’s two tumultuous administrations.

The Five Star Movement, which swept elections three years ago with a left-wing populist agenda, signaled grudging support for Draghi. Matteo Salvini, the leader of the right-wing League who once wanted to take Italy out of the euro zone, tried to charm the former central banker with jokes and soccer banter.

You’ve sat through all these talks, he told Draghi. You’re not thinking of giving up the mandate now, are you? Draghi just smiled. Then Salvini went out and publicly announced his support for the ex-ECB chief.

©2021 Bloomberg L.P.

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