Rome The Mario Draghi chapter is complete. Italy is facing new elections, and President Sergio Mattarella dissolved the chambers of parliament early Thursday evening. The former central banker was in office for exactly 522 days, a little over 17 months. These were times of crisis, economic, pandemic, and since the outbreak of the Ukraine war also geopolitical. At the same time, Draghi can look back on a unique upswing, on a successful vaccination campaign, on renewed confidence in the markets for the notoriously highly indebted country.
What will remain of Draghi – and where does his resignation leave a gap? A look at the four things that the 74-year-old has changed in his home country – and which are now in acute danger.
Draghi had no government experience when he moved into the Palazzo Chigi, the official residence of Italy’s prime minister, in February 2021. The former head of the ECB was already retired when he was suddenly ordered to Rome.
As a non-partisan, he initially seemed to hover above politics. Shortly before, the parties had been at odds over the use of EU funds and even collapsed the centre-left government to do so, but Draghi was suddenly able to unite all political forces behind him, from the left to the center to the right. Six parties and more than 80 percent of parliamentarians supported his “coalition of national unity”.
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Draghi came into office with two missions: to speed up the sluggish corona vaccination campaign and to rewrite the recovery fund plan criticized by Brussels. He made both a matter for the boss, both succeeded.
To fight the pandemic, he quickly ordered a general with logistics experience, and a new lockdown was prevented by the soaring vaccination rates.
He appointed a special commission for the reconstruction fund, had a reform passed to simplify bureaucracy, and thus ensured that the first projects from the Brussels Corona pot have already started today, for example in the expansion of the high-speed rail network.
In addition, there was an unprecedented upswing after the corona crisis, which made Italy grow faster than the rest of Europe. The unemployment rate was 10.2 percent when Draghi took office, and was last at 8.1 percent.
But after the summer, the first cross shots from the parties began. Draghi let everything bounce off him, did not allow himself to be drawn into the political drama, ruled with a forgiving tone but tough action.
But this year the party quarrels increased, in press conferences Draghi was increasingly annoyed when it came to the stability of his government – and no longer about the content.
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Stability has been destroyed by the current crisis, and the trust of the former partners has been permanently shattered. The first prominent politicians are already leaving the parties that have refused to trust Draghi. Such a broad government across all party camps currently seems unthinkable. Italy will now fall back into camp thinking, into polarizing blocs between centre-left and centre-right.
2. International Standing
Through his time as a central banker, Draghi has an excellent network in Europe and beyond. With him at the helm, Italy, often ridiculed as an unstable southern country, suddenly had weight in negotiations in Brussels again.
It was pure coincidence that Italy held the presidency of the 20 largest industrialized nations in Draghi’s first year. The greatest success of the ministerial meeting, a global minimum tax for companies, was largely driven by Germany, but was ultimately adopted in Italy.
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Even if the G20 summit in Rome ended up falling short of expectations, especially with regard to the answers to the climate crisis, one thing stuck around the world: the perfect organization of the summits in all parts of the country and the hospitality of the Italians and its prime minister – a big fan of multilateralism.
After Angela Merkel’s resignation as Chancellor last fall, Draghi’s importance increased even more at international level. Together with French President Emmanuel Macron, he seemed to be the new center of power in Europe, the artificial word “Dracron” made the rounds.
In the Ukraine war, Draghi gave Russia the cold shoulder right from the start. He was also the first Western politician to openly advocate Ukraine’s prospects of joining the European Union. He kept phoning Ukrainian President Volodymyr Zelenskiy, even on Tuesday evening, long after the crisis in Rome had escalated.
The experience, the network, the standing: Italy will now sorely miss all of this. There is already fear in Brussels of a possible prime minister from the right-wing camp. The post-fascists from the “Brothers of Italy” are currently ahead in the polls. Party leader Giorgia Meloni, who has been calling for new elections for months, is even said to be working on her cabinet list.
Alternatively, Matteo Salvini could lead a right-wing alliance. The head of the Lega has repeatedly torpedoed the work of the government, even though his party provided several ministers. The populist is considered a friend of Russia and was photographed a few years ago with Putin’s likeness on his shirt on Red Square in Moscow.
The election will take place at the end of September or beginning of October. But it could be weeks before a new government is formed. “How long it takes depends very much on the election result,” says Wolfgango Piccoli from the political consultancy Teneo. “It’s hard to imagine how a new executive would be installed before November.”
3. Overdue reforms
Above all, Draghi learned one thing from Italian politics: you don’t talk and negotiate about reforms forever, you just do them, “whatever it takes”. At first, Draghi was also successful here: after years of arguments, he brought a judicial reform through parliament. Administrative procedures were simplified with another reform.
Italy punctually complied with all the steps required by the EU, and the first tranches of the reconstruction fund have already been paid out. Italy, hitherto ridiculed for its sluggish bureaucracy and ineffective courts, was well on the way to becoming a model student.
Unity government in Rome collapses – Draghi submits resignation
But since the beginning of the year, the zeal for reform has faltered, thanks to the belligerent parties, which are probably already eyeing the 2023 election date. Draghi still had so many projects on his to-do list by the end of the legislature: a pension reform to increase the retirement age and make social security funds more sustainable, a far-reaching tax reform to relieve companies, a competition reform to make the domestic market more consumer-friendly.
Some of the plans are also linked to the reconstruction fund. There is now a question mark over the next tranche, around 22 billion euros by the end of the year. “The prospects for reforms have been largely wiped out,” comments Marco Wagner, Senior Economist at Commerzbank, on the current crisis.
4. Confidence in the markets
It is something like a clinical thermometer for confidence in Italy on the markets: the difference in interest rates between German and Italian government bonds, or spread for short.
Even when there was speculation about Draghi, the value fell below 100 points. In the first Draghi summer, the spread was sometimes 91 points. Draghi and his broad government majority were an anchor of confidence for the markets, a guarantor of stability that the third largest economy would not become the problem child of the euro zone.
Italy has been highly indebted for decades and currently holds a good quarter of the liabilities in the entire euro zone. The corona crisis raised the debt ratio in relation to economic output to new records: for the first time it was more than 150 percent. Nevertheless, investors never lost faith in an improvement.
Also because Draghi and his finance minister Daniele Franco, like the prime minister, a central banker of the old school, were able to credibly outline how, thanks to growth and austerity, they want to comply with the EU’s debt rules again in a few years’ time.
Even during the Ukraine war and the energy crisis that followed, the duo managed to get by without a supplementary budget – even though several billion euros were set aside for relief.
Now the guarantor has ceded. And the markets immediately panic. Already in the past few weeks, when the government crisis became apparent, the risk premium increased again.
On Wednesday evening, after the confidence vote in the Senate, 213 points were reached, the highest since June. During the course of Thursday, the spread temporarily climbed to 226 points. The interest rate for ten-year government bonds also rose to a good 3.6 percent.
This increases Italy’s debt service, even if high inflation will cushion the increase slightly. The Italian stock market index FTSE MIB, comparable to the German Dax, temporarily lost 1.3 percent on Thursday.
For analyst Marco Protopapa from JP Morgan, the downside risk for Italy is increasing, which has already significantly depressed growth expectations due to the already sharp rise in gas prices.
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