Draghi’s Move to Italian Presidency May Ruin the Recovery

(Bloomberg) -- The prospect of Mario Draghi becoming Italy’s president is a major risk for the country’s economy and such a move would also impact the broader euro area. Bloomberg Economics has modeled the likely fallout, assuming that the ensuing political instability widens sovereign spreads by 300 basis points and uncertainty jumps by two standard deviations. With a limited mandate to act, the European Central Bank could be slow to agree on more bond buying. Tight financial conditions could chop more than 4% from the level of GDP by the end of 2022, but activity would recover faster than after the euro-area debt crisis as the ECB responds, spreads narrow and austerity is avoided. That still wouldn’t be a pleasant ride for financial markets.

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