Italy Turns to Its Central Bankers When Politicians Fail

Every time Italy is about to go off the rails, there’s always been the same solution: call in the technocrat. Former European Central Bank President Mario Draghi is the latest in a long list of fixers.

That’s when you know things are really bad, either because the finances are in such disarray that bond markets are panicking or because the usual bickering among parties has turned into complete political gridlock. It’s a peculiar way for a western democracy to function, especially since the outsider brought in to solve the most intractable of problems is not elected by the people.

“After a lot of troubles Italy is in very good hands and not in populist hands,” former Prime Minister Matteo Renzi, who prompted ex-Premier Giuseppe Conte’s resignation by withdrawing his small Italy Alive party from the ruling coalition, said in an interview Thursday. “Mario Draghi is the best man, he saved the euro and will save Italy.”

Italy Turns to Its Central Bankers When Politicians Fail

But like Italy’s tradition of revolving-door governments, the reasons are rooted in the country’s past. The framers of the postwar constitution wanted to ensure that Italy’s parliamentary system would be fully inoculated against the threat of dictatorship. If the price was a proliferation of parties and unruly coalitions, so be it.

That’s why Italy’s head of state, a ceremonial position in normal times, becomes critical during a crisis. When there is no way out, and elections are too risky, the president can make the call and appoint an expert. In accepting that challenge, Draghi said “it was a difficult moment.”

“It’s a way out when the system breaks down,” said Stefano Silvestri, a political analyst and adviser to governments, who served under Lamberto Dini’s technocratic government in the 1990s. “In my experience, the advantage of a technical government is we were able to talk to all political forces to get things done, so we passed both left-wing and right-wing measures without prejudice, gathering support across the board.”

This is the fourth time in three decades that a technocrat has been appointed to address the country’s various dysfunctions. And the move usually comes as a relief to investors and disillusioned Italians. The technocrats get a year or two to make the kind of painful and unpopular cost cuts that politicians are loathe to push through. When the job is done, the country goes to the ballot box.

Italy Turns to Its Central Bankers When Politicians Fail

In Draghi’s case, if he can negotiate the support he needs from Italy’s fragmented parliament, the job won’t be to slash but to build. And he’ll have over 209 billion euros ($251 billion) of cash coming in the next few years via the European Union recovery fund to help him.

He’ll need to show a common touch as well. The pandemic has not only devastated the economy, it’s also traumatized the nation. Italians are still haunted by images of coffins in line for the morgue in the city of Bergamo.

They also have terrible memories of their last technocratic government led by economics professor and former European Commissioner Mario Monti, whose tax hikes and tough pension reform, aimed at producing financial stability, were deeply unpopular.

“Monti’s austerity backfired, contributing to the rise of populist parties like the Five Star Movement, it reinforced negative feelings against experts perceived as a privileged elite,” said Sofia Ventura, professor of political science at the University of Bologna.

The habit of placing technocrats in power started after an entire political class was wiped out by a series of corruption scandals in the 1990s. In the immediate aftermath, former central banker Carlo Azeglio Ciampi stepped in to stabilize things.

It happened again in 1995, following the fall of Silvio Berlusconi’s first government. That is when Dini, another economist and Bank of Italy veteran, stepped in. The country’s central bank has produced most of Italy’s technocratic leaders, including Draghi.

Then in 2011, after Berlusconi’s last government fell apart, with bond yields at historic highs, Monti was called in. But this time, the technocrat left a damaging legacy.

‘Consummate Politician’

The image of an unemotional, gray-haired man in a sharp suit was jarring to an impoverished country. Monti was seen as too close to Brussels, a stickler for imposing debt and deficit rules. This was the moment when euroskepticism began to take root in Italy, a dangerous political shift for one of the EU’s founding members.

While Draghi will need to overcome those negative associations, he’s got one thing in his favor. The pandemic has normalized government intervention across the world, and most administrations in Europe are engaging in state aid and support in various forms to keep their economies running.

“He’s a highly skilled operator, a consummate politician and we know he’ll do “whatever it takes” to steer Italy out of its worst economic and health crisis since the war,” said Neil Wilson, chief market analyst at trading platform Markets.com. “As far as technocrats go, you won’t find a better one.”

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