Comic strip: Mario Draghi saved the euro. Can he save Italy?


By Geoffrey Smith – After saving the euro from a speculative attack eight years ago, Mario Draghi arguably accepted an even greater challenge: to save Italy from itself.

Italian assets have been in tears since his name was first mentioned as the most likely candidate to replace Giuseppe Conte as prime minister as head of a national unity government. The has increased by 9.5% since the beginning of the month, against 5.7% for the (the outperformance is even more important if we strip the Italian components of the latter).

Shares of Italian banks did even better, rising 10% to 20% as investors previously leery of Italian country risk adopted some of Europe’s most productive sovereign bonds.

Italian government debt yields fell sharply and the infamous spread over their German counterpart, a rough indicator of systemic stress in the eurozone, collapsed to its lowest level ever.

There is obviously no limit to faith in “Super Mario”. But is this justified?

The challenges are daunting: first, there is the pandemic, which has claimed more lives in Italy than anywhere else in the European Union (94,000, according to Johns Hopkins) and which has almost certainly plunged the country in a double-digit recession: Gross domestic product contracted 2% in the last quarter and lockdowns appear to be keeping it in negative territory in the current three months. Health Minister Roberto Speranza was clearly one of the very few ministers to retain his post when Draghi announced his cabinet over the weekend.

Then there are the structural reforms, which Draghi used to urge each month at his press conferences in Frankfurt. Without them, analysts say, it is only a matter of time before Italy’s chronically weak growth and its mountain of debt of some 2.5 trillion euros call into question the viability of Italy. the single currency. Italy is the third largest economy in the euro area and one of the founding members of the EU. Getting out of the euro would be a much bigger disaster than the loss of Greece would have been.

“With Italy always being the elephant in the room when discussing the viability of the euro project, the performance of this administration will resonate well beyond its borders,” JP Morgan Analysts led by Bruce Kasman said in a note to clients this week.

Draghi’s to-do list is long: the tax and judicial systems remain ripe for simplification, as do local planning rules; the financial system remains cluttered with bad assets due to bureaucracy. The authorities have shown remarkable ingenuity in trying to clean up bank balance sheets in recent years, but the problem will remain as long as the average bankruptcy takes seven years to be processed.

The measure of Draghi’s success in this area may well be the sale of Banca Monte dei Paschi di Siena (MI :), the most notorious “ zombie bank ” in the euro area, which risks being liquidated by the BCE if the government can’t find a buyer in a matter of weeks.

The problem, as Draghi and anyone who has tried to rule Italy knows, is that reform creates more losers than winners in the short run, and potential losers are apt to use a system with multiple checks and balances to thwart any attempt at change. the status quo.

For Draghi to be successful, he needs factions in his government to collectively abandon some of the constituencies that put them in power. This is perhaps the biggest challenge of all. By giving ministerial positions to all parties supporting his government, he has at least made it harder for parties to escape responsibility – and popular discontent – for what is to follow. The key question, and unanswered at this time, is how long Draghi can maintain discipline and unity as he pushes reform forward.

Markets won’t have to wait long to see how much Draghi is willing to risk: the country must present a “recovery and resilience” plan to the European Commission by April to release more than € 200 billion in funding from the EU Recovery Fund. This should show that Italy can finally get out of its current difficulties. For this, Draghi will have to mobilize all the goodwill at his disposal not only in Italy, but also in the financial markets and in European capitals. The result is far from guaranteed.


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