- Draghi takes the helm with broad support
- He needs to spend the pandemic aid wisely
- Italy’s recovery is vital to EU future
- The ghost of Brexit loom as populist alternative
- Draghi’s success will be EU success
Mario Draghi is regarded by many market participants as Super Mario for his Herculean task of saving the euro and stabilizing the European monetary union during his tenure as ECB chief in the wake of the Global Financial crisis.
Draghi is famous for his “whatever it takes” comment with regard to the euro that halted the slide in the currency as it tumbled to multi year lows. (A comment that he added to his speech only as an afterthought while he was shaving in the morning before delivering it publicly.) But his true contribution came in the form of radically changing the mandate of the ECB to allow the central bank to act as de-facto source of stimulus by creating the QE program while at the same time camouflaging his actions as a fight against deflation – in order to remain faithful to the ECB mandate for price stability.
Now Mr. Draghi once again finds himself thrust into the limelight of history after being asked to become the Prime Minister of Italy – a post that he has assumed as result of nomination rather than election. And once again the market is betting on Mr. Draghi’s magic touch to rescue not just Italy but the European Union itself.
Broad Support in Italy
Mr. Draghi comes to power with an unusually broad mandate holding the support of 4 out 5 main Italian parties including 5 star. 5 star’s support for his agenda is crucial because it is largest party in Italy with strong populist steak that is largely anti-euro. If Mr. Draghi can demonstrate that the bureaucracy in Italy is finally working for the interest of the common man, it would go a long way towards quelling any impulse to secede from the union.
Mr. Draghi has one distinct advantage from his predecessors – he comes to his post looking to spend money rather than cut the budget. Italy will receive about 220 Billion euros from various European relief funds to use for the pandemic recovery and those funds must be spent wisely if he is to succeed.
Italy is unique in the Eurozone because it is essentially two different countries. The highly advanced and industrialized North where the per capita GDP rivals that of Switzerland and the impoverished South that over the years has absorbed billions upon billions of transfer payments without much progress. Draghi’s task will be a careful balance to make sure that aid funds are spent properly while at the same time implementing reforms to jumpstart Italian sclerotic economy which has seen no net growth this century so far.
Italy is Lynchpin to European Union
It is a massive political and economic task and perhaps only Mr. Draghi could tackle it given his stature as a technocrat rather than a politician. It is vital for Mr. Draghi to succeed given Italy’s linchpin status in the EU. The European Union has been able to survive the ups and downs of the global economy and the highly diverse composition of its member nations despite having a monetary union but no unified fiscal budget. That has always been the central weakness of the euro project and almost all experts agree that if the block is to survive as an economic unit into the future it will have to create some common fiscal authority.
To do that the EU will first have to convince its citizens that the current framework is actually beneficial to their individual lives. This year the union stumbled badly in its rollout of the vaccination programs – just the type of unified response that should have been the basic function of the EU. As authorities scramble to fix the problem and re-open the economies on the continent, Mr. Draghi must convince his fellow Italians that working within the union is truly better for the welfare of all. If his policies can spur growth, much of the populist unrest will be soothed. However if his tenure turns sour the impulse to secede will grow stronger
The Ghost of Brexit Hovers as a Threat
With Brexit now done there is a template in the EU for secession. It may be too early to tell if the UK will thrive or fail in its experiment to stand alone, but so far it has managed to survive while seeing its currency hit a three year high as GBPUSD crossed the 1.4000 mark. Seeing this the Italians may have short memories of the devaluation of the lira and could press for an exit from the EU.
While Italy is not the largest economy in the block – it is in many ways the most important. It stands at the intersection between the prosperous and frugal North and the more profligate and less prosperous South. If Italy decides to follow the UK it is difficult to imagine the EU remaining as a single entity in the wake of such a move. At best the union may reconfigure as as Northern and Southern economic blocks – but its power as a single transparent, friction free trading market will be greatly diminished, So once again, Mr. Draghi must become Super Mario in order to revive Italy and preserve the European Union.