The Daily Update: Super Mario Takes The Helm

Mario Draghi, the former head of the European Central Bank, who was confirmed as Italy’s new prime minister earlier this week will have to hit the ground running as the southern European country navigates its way out of the global pandemic and economic crisis. At least he seems to have the support of the electorate, for the moment at least, with 67% of Italians believing Draghi’s policies will help the country out of the crisis.

Draghi has come a long way since 2011, when a fully technocratic government led by economist Mario Monti was brought in after the resignation of Berlusconi to avoid the country’s economic collapse in the wake of the sovereign debt crisis. Monti implemented controversial reforms and emergency austerity measures aimed at restoring the confidence of international markets. At the time, Draghi was at the helm of the European Central Bank and had infamously co-signed a letter with outgoing ECB president Jean-Claude Trichet asking Berlusconi’s government for reforms and spending cuts.

The one major difference now is that Draghi’s government has money to spend to try to expand Italy’s economy. The government will have approximately EUR220bn euros in EU grants and loans available as part of the EU’s coronavirus recovery package. It’s going to need it. Italy’s debt is on course to hit nearly 160% of GDP by the end of this year, second only to Greece within the EU, who’s debt to GDP hit more than 205% last year, with its 10-year government bond trading on a yield of less than 1%!

For many Italians, the pandemic, along with more than 10 years of economic stagnation, have caused not only soaring levels of government debt, but also of poverty and inequality that have hit young people and women particularly hard. The Italian Institute of Statistics latest unemployment data shows that 98% of those who lost their jobs in December were women.

As the third-largest economy in the EU, Italy will receive the biggest slice of the coronavirus recovery package (although not the largest as a percentage of GDP). Its success in implementing the reforms and ensuring its economy is brought back on track will not be easy and will be closely watched, particularly by the more ‘frugal’ northern countries who had pushed to cut the recovery package, and by the international markets. We know markets have reacted positively to Draghi, however that goodwill will be short lived if both he and his government do not deliver.