Whatever it takes in Italy?

BOLOGNA  —  In 2012, then-European Central Bank President Mario Draghi pulled Europe from the depths of economic crisis with his famous promise to do “whatever it takes” to save the euro. Now, Draghi’s native Italy is hoping he can save it, too, by leading a new unity government. But even for “super Mario”, success is far from guaranteed.

Draghi’s skill, competency, and credibility are not in question. And he will surely choose a highly qualified Cabinet. But the challenge ahead should not be underestimated. Not only has Italy’s long-running economic crisis been compounded by the catastrophic COVID-19 pandemic; the country has been mired in a paralysing political crisis.

If Draghi is to address the COVID-19 emergency effectively, let alone fortify Italy’s economic foundations, he will first have to find a way to navigate the country’s intricate politics. That means, for starters, securing the full support of the anti-establishment Five Star movement (M5S).

In Italy’s 2018 general election, the M5S became the largest party in parliament, thanks to its Euroskeptic platform. The party’s leadership even accused Draghi, who left the ECB the following year, of “attacking Italy”. While the M5S has softened its stance considerably since then, and pledged its support for the Draghi-led government, it remains deeply divided, and many of its members consider this support as an unpalatable U-turn.

But the M5S is only part of the equation. Draghi’s new government will probably also need the votes of small centrist parties and former Prime Minister Silvio Berlusconi’s Forza Italia, and possibly even Matteo Salvini’s far-right Lega, in order to secure a parliamentary majority. But, even if he can form such an alliance, it will remain unruly, and could easily become hostage to the disputes, preferences, and whims of its members.

And there is much about which Italy’s political forces could disagree. The Draghi government’s agenda will have to include both short-term emergency interventions and long-term structural reform measures, all of which will require significant public spending. The EU’s 750 billion euros ($902 billion) COVID-19 recovery fund, from which Italy, one of the countries most affected by the coronavirus, should get some 200 billion euros, has been devised with this in mind.

Draghi has acknowledged that any solution to the COVID-19 economic crisis “must involve a significant increase in public debt”. But, for Italy, that increase must be significant indeed.

When the COVID-19 shock arrived, Italy had not fully recovered from the 2008 global financial crisis. In 2020, the country’s GDP contracted by nearly 9 per cent. Add to that the surge in public spending, aimed at cushioning the blow to businesses and households, and the country’s government debt-to-GDP ratio has soared to approximately 155 per cent.

GDP is expected to expand by just over 4 per cent this year. However, once the rebound from last year’s contraction is over, GDP growth will slow significantly. Real output thus appears unlikely to return to pre-pandemic levels, thereby reducing the debt-to-GDP ratio, within the next few years.

According to Draghi, the key to keeping high levels of debt sustainable is to channel public spending toward “productive purposes”, such as education and skill formation. But Italy’s political parties may not agree with Draghi’s distinctions between “good” and “bad” debt. There is already widespread disagreement on how to spend the money provided by the EU recovery fund.

More fundamentally, while productive spending is part of the debt-sustainability equation, keeping debt-service costs low is also essential. For that, a functioning government is a necessary, but not sufficient, condition. The politics need to be credible as well.

Draghi’s personal stature will help here, Italy’s stock and bond markets rallied at the mere thought of a Draghi-led government. But no one person can guarantee a country’s ability to meet its debt obligations. And Italy’s dysfunctional politics have consumed many good men, who still dominate Italian politics, in the last quarter-century.

If Draghi is to avoid this fate, he must focus on laying the groundwork for Italy’s economic transformation, rather than leading the process. This means setting a time limit on his leadership: No matter how much pressure he faces, he should not remain prime minister past 2022, and perhaps not even that long. In fact, a general election should be called as soon as possible.

There is no recipe for remedying Italy’s political crisis, and no one should expect Draghi to provide one. A technocratic government needs to be effective and short-lived, allowing its legacy to be defined by the work of its successors. This means that Draghi’s focus should be on guiding Italy’s political forces toward sustainable policy decisions.

It also means that those forces must figure out how to engage with one another constructively. That is, after all, the mark of a mature democracy. Attempting simply to suppress some voices, such as those of the Euroskeptics and even fascists, could cause pressure to build, leading to a potentially devastating explosion. Defusing such forces through dialogue and effective governance is the only credible way forward.

Italy’s current crisis, coming at a time when citizens were languishing in lockdown and the much-touted vaccination program had reached less than 4 per cent of the population, has further depleted Italians’ confidence in their political leaders. With deft and bold action, Draghi can go some way to restoring that confidence. But he cannot do it alone.

Paola Subacchi, professor of International Economics at the University of London’s Queen Mary Global Policy Institute, is the author, most recently of “The Cost of Free Money”. Copyright: Project Syndicate, 2021. www.project-syndicate.org