Italy has another new government; the 67th since 1946. An argument over the management of EU COVID-19 recovery funds led to the appointment of Mario Draghi, the former president of the European Central Bank (ECB), as prime minister. He is after all credited with saving the euro-zone by pledging to do “whatever it takes” during the 2012 debt crisis.
Despite fears he might decline the offer, he agreed to save Italy from political turmoil. The hope is he will guide the country through this crucial phase of the fight against the pandemic and its economic fallout. He managed to form a cabinet comprising politicians from most parties as well as several technocrats. They promised to navigate the situation with pragmatism and a long-term vision.
Draghi’s main goals as prime minister are to deliver a vaccination programme and kickstart the economy through a sensible distribution of EU funds. He plans to do the latter by raising investment and reforming the tax and judicial systems.
No doubt many Europeans will rejoice at the appointment of such an influential and respected figure. Indeed, his quest to save the euro was hailed as a success for European unity against formidable challenges. The hope in Italy is that he will once again bring it closer to the EU.
Draghi’s appointment is good news for investors in Italian assets, particularly sovereign debt. Italy’s economy and fiscal affairs are in capable hands, and investors should expect them to reflect the current fundamentals of the economy.
However, investors, and generally all those who care about Italy’s future within the EU, should never let their guard down. Draghi has a mountain to climb. Even his skill, composure and vision may not be enough to recover the country’s fortunes.
Political risk has not disappeared. Most parties, except for the influential right-wing Fratelli d’Italia, gave their support to Draghi’s government. He gave them cabinet positions in return, ensuring they have a stake in its success.
However, he remains a technocrat who lacks the legitimacy necessary to implement serious reforms. In addition, maintaining support from both sides of the political spectrum could be a distraction for him.
Modernising Italy’s economy could take years and demand a complete overhaul of its politics. Yet Draghi has only two years before the next parliamentary elections. Although he is probably the right person to carry Italy through this difficult phase his impact may be short-lived.
Investors in Italian assets should never lose sight of both long-term fundamentals and political risk.
Carlo Svaluto Moreolo, Senior Staff Writer,
carlo.svaluto@ipe.com
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