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A(nother) New Day in Italy
Stop us if you’ve heard this one before: A newly named Italian prime minister declares he will finally enact changes to the country’s bureaucratic and legal structures to get the third-largest EU economy rolling again. This time, it’s Mario Draghi—of euro-savior fame—who will also be coordinating efforts to secure €200 billion in funding from the EU’s inaugural stimulus package raising debt as an entity. Italy, whose economy has been deeply damaged by COVID-19, is set to receive more funds than any other country. If the EU plan is to succeed, Italy must arguably play a big part in the success.
Sense of déjà vu aside, investors are certainly signaling enthusiasm as new PM Mario Draghi takes the helm. Italy’s February 10-year debt auction drew €110 billion in bids for some €10 billion of bonds. The Italian Bourse surged in February’s first two weeks. For Italy, though, an incoming leader promising a sea change is hardly new. The need for meaningful reform is real—and Draghi arguably faces significant hurdles.
Draghi is Italy’s seventh prime minister since the euro crisis’s 2010 onset. Most predecessors also promised reforms. Technocrat Mario Monti, faced with drastic austerity demands from the so-called troika (the European Commission, ECB and IMF), actually implemented them—which ultimately spelled the end of his reign. Draghi, another technocrat, not only has to effect reforms—he has to wield sufficient political clout to maintain his seat and see them through.
Like Monti before him, Draghi may not have much time to act. His already-thin coalition consists of groups that disagree with some of his main beliefs, like his strong pro-EU stance, and could easily crumble—whether he’s successful or not. Given the breadth and depth of reform required—from dismantling deeply entrenched bureaucratic procedures to unleashing competition and accelerating a historically slow legal system—the odds seem rather stacked against him, particularly with elections set for early 2023.
Then, too, Italy is already starting from behind: Spain (also in need of reform) has already outlined its plans for its grant—a precondition for receipt of EU stimulus funds. Not only has it outlined a budget to incorporate the €70 billion in grants over the next three years, it has also passed legislation to curb delays in the use of the funds, shared a list of 170 proposed reforms with the EU and borrowed €27 billion against the grants.
Italy’s plan for the stimulus funds takes on added importance given the country’s poor track record: Of the EU’s 2014-2020 structural funds budget, Italy spent just 43% of its allotted money by the end of 2020—ahead of only Spain (funnily enough). Finland had the EU’s highest spending rate at 81%.
While the potential roadblocks are many, Draghi has a potential leg up on his predecessors: an immediate seat at the head of the EU table. As head of the ECB in 2011, he helped shepherd the euro zone through a debt crisis many feared could end the EU’s shared currency experiment—if not the EU as a whole. Whether his background is sufficient to buy him the time needed to make actual change in Italy is an open question.
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