Draghi’s Italian Economy

Italy has recently gone through a summer of overachievement, giving the nation a plethora of things to cheer about. At first, Italian band Måneskin won the European Song contest, followed by its Azzuri clinching the European Championships by beating England in the final, its sprinters winning gold in 4×100 relay at Tokyo and an Italian winning the Nobel Prize for Physics. These successes have coincided with the arrival of a new government in Italy, led by former President of the European Central Bank (ECB) Mario Draghi. During the height of the euro crisis, Draghi had flooded the Eurozone with large amounts of loans and quantitative easing, to save the eurozone, earning him the nickname “Super Mario”. But how will his premiership of Italy shape the Italian economy, and will he do “whatever it takes” to return Italy to a path of growth?

Background

Mario Draghi took over a country that was reeling from the Covid-19 pandemic, with an economy that had gone through years of stagnation. Italy’s GDP still sits below its level of 2009, having never fully recovered from the global financial crisis. Its national debt pile has reached € 2.8 trillion or 161% of GDP, second in Europe only to seemingly constantly-in-crisis Greece. It’s youth unemployment rate stands at around 29%, nearly a third of young Italians. Italy’s population had to 59.55 million, a decline of more than one million since its peak of 60.79 million in 2014, with about 150,000 Italians leaving the country every year in hopes of better prospects elsewhere. The Italian economy was stuck in a hole of low productivity and growth. Italy needed a fast-growing economy to reduce its debt pile, which had formed as a result of excessive spending, especially in the 1980s and 90s. But unlike fellow crisis country Ireland, this growth never arrived, with Italy’s GDP still declining in 2012 and 2013, and only growing at a slow rate of less than 2% in the following years.

However, economic growth needs a framework of efficiency, which was not as strong in Italy as it was in other western countries. Italy ranks 52nd on the Corruption Perception Index, much lower than fellow European economies such as Spain (32nd) or France (23d). Corruption is a major hinderance to business, with foreign and domestic firms withholding essential foreign investment when it becomes more expensive due to corruption as well as riskier and more time consuming. Italian bureaucracy is notoriously slow and inefficient, preventing entire investments by smothering them in the paper machine, and making business difficult for individuals, investors and companies (Italy only ranks number 58 on the ease of doing business index).

Crime and the Italian mafia remain a big problem, especially in the south, the so called Mezzogiorno which remains much poorer than the north. The coronavirus pandemic had worsened Italian conditions, having led to a decline in GDP of 8.9%, highest in western Europe. At these times of troubles, where were Italy’s leaders? Italy’s notoriously unstable political system of alliances, intrigues and backstabbing has produced 59 prime ministers since WW2, making it hard for the country to steer on a clear course. The last election occurred in 2018, leading to an anti-establishment coalition of the centre-right Lega party led by Matteo Salvini and the left-wing populist party 5 stars founded by the comedian Beppe Grillo and led by Luigi di Maio, a horror scenario for the European Union. This coalition of convenience was headed by the independent Giuseppe Conte and sought to increase expansionary fiscal spending in a form of clientelist policy against EU opposition, leading to a fight with Brussels which was eventually resolved when the government agreed to reduce its spending.

Key reforms which were started under Conte’s predecessor Matteo Renzi were discontinued, some even reversed, meaning that Italy stayed in its economic malaise. In 2019, the coalition imploded over the Turin-Lyon High speed railway project (TAV), with the more northern Lega voting with the opposition against its more southern Italian and environmentally focused coalition partner. A subsequent coalition formed by the 5 Stars as well as the centre-left PD and a new party created by former PD leader Matteo Renzi called Italia Viva (IV) imploded when IV pushed the red button and withdrew its support from the Conte government. And so, another Italian government collapsed, a tale as old as times. President Sergio Mattarella reached out to all major parties, and eventually contacted Mario Draghi to form a new government of national unity, a last big challenge for the former ruler of the euro.

Draghi’s first task was to form a new cabinet. Supported by six political parties from the right-wing Lega through the centre IV to the left-wing Article 1 party, Draghi eschewed partisan politics and called a record number of 9 independents into his cabinet. Key ministries were given to independents, such as the ministry of Economy and Finance given to former IMF board member Daniele Franco or the ministry for Technological Innovation and Digital transition given to former Investment Banker and Vodafone executive Vittorio Colao. Draghi decided to take a historic opportunity to improve Italy and did not want it to get caught up in party politics. For Italy, it is now or never.

Coronavirus response

On the 21st of July 2020, the European Council agreed to the Next Generation EU fund (NEGF), a €750 billion bailout to pay for the damage the coronavirus pandemic had inflicted upon Europe. Having its economy most damaged by Covid in an already poor state, Italy became the largest recipient of the fund, receiving a total of €191.5 billion. However, before the money was paid out, each government would have to submit a plan on how it would be spent which would have to approved by the EU. So, Draghi went to work. Draghi is aware of the sicknesses of the Italian economy, with reforms being delayed for too long by Italy’s gerontocracy. With wide party support, Draghi decided that it was the time to push through key reforms that are sometimes painful but necessary, embarking on a similar quest Matteo Renzi had gone on 5 years earlier. First, he submitted a proposal to the EU that detailed Italy’s planned spending of the NEGF. Italy’s plans included vital spending for an economically successful and green future, such as €32.5 billion spent on sustainable mobility or €13.4 billion spent on the digitalisation of businesses. But just as important as the sums of money spent are the structural forms that the plan promises and that are currently going through the Italian parliamentary machine.

In May, a package of reforms was passed to reduce the length of bureaucratic processes through streamlining and simplifying of bureaucratic hurdles and red tape. A justice reform was passed to reduce the long waiting times for court cases (the longest in the EU) to resolve business disputes quicker and create a more stable environment for litigation and the rule of law. GDP is expected to grow by over 6% next year, in part due to an extensive vaccination campaign that rapidly immunized the country against Covid and allowed a partial reopening.

So, what does the future hold? Draghi’s first steps have been promising, passing key reforms to the Italian economy. However, challenges remain. His coalition is partly unstable, with the justice reform leading to infighting with the 5-star movement. The right-wing Brothers of Italy party (FdI) is climbing in the polls and could become the strongest party in the next Italian election in June 2023. Draghi’s biggest problem might be time. Sustainable strengthening of a country’s economy takes time, especially of an economy like Italy, with reforms only slowly bearing fruit as opposed to being a quick cure-all. With elections just around the corner, it is not just a matter of time for Draghi, but if Italians are willing to fundamentally change the way their country and its economy is run.