There are a lot of us out there that love Mario Draghi and respect what he did at the European Central Bank. You only need to look at the heart I drew on his photo to gauge my view of the man’s work. But it is enough to save Italy?
The market seems to agree with my admiration of the man. Government bond yields and the Italian stock exchange rallied on the possibility of Draghi leading Italy. Wrangling the EU might look like a walk in the park though, compared to sorting out the complex challenges in his home country.
Maybe, though, a good relationship with the EU is enough to paper over a lot of the domestic strife and save Italy. Draghi definitely knows what to say and what to do to buy time which can create the space and time for painfully slow policy development.
Italian Stock Exchange
Italian 10 YR Bond Yield
I’ve written a lot about Italy. It has an interesting mix of both developed and emerging market characteristics. There’s not a natural European country to pair it with because it dominates in size but sits fairly low as a flawed BBB. I also find it interesting because it is one of the few countries with positive yields. At least in the 10 YR bond and at least for now.
Will Draghi do for Italy what he couldn’t do for it when he was at the ECB? Drive Italian 10 YR yields negative?
I think Draghi’s reputation and the momentum of him ‘saving Italy’ could take the bonds a long way towards negative yields. That answers today’s question. Italy, despite the recent performance, could still perform more in the short term.
However, when Draghi’s reputation and his drive for reform run up against the fully entrenched interests that keep Italian politics forever in gridlock, even he is likely to falter. The medium-term answer is you need to find a level to exit and stick to it. Italian politicians will eventually baulk at Draghi’s reforms, pushing him, as well as bond yields, out.
There have been technocratic governments before. Yet we find ourselves again waiting for a technocratic administration to save the day. Draghi is better placed than Italy’s last technocratic government to succeed. Former EU Commissioner Mario Monti, whose short-lived administration ran from 2011 to 2013, was doomed almost from the start. Monti had to come to Rome as almost a Brussels proxy, to implement everything Brussels wanted to ‘save Italy’ but the result was worse unemployment, worse growth and higher taxes.
Italian GDP
Italians weren’t so pleased with that result and looked to the new administration in 2013 to repel the Brussels influence. We saw the 5 Star Movement challenge established coalitions at the polls and come out with a decent showing. Italian politics shifted away from the Berlusconi era into an anti-establishment, anti-Brussels rhetoric that continually made the bond market nervous and looking for an Italexit.
Draghi brings a lot more to the table than Monti did and squashes any remaining fanciful Italexit discussions. He’s a hero in Brussels and a hero in Italy. The hero in Brussels part is important. He’s got a window of opportunity to take advantage of the EU’s acceptance of deficits and the 200 billion euros ($241 billion) earmarked for Italy in pandemic aid from the European Union. The EU has put on hold its propensity to scold its southern neighbours and recognizes with the fallout from Covid-19, it must offer compassion and cash.
Photo: EPAOutgoing ECB president Mario Draghi (3L), his successor Christine Lagarde (R), French president Emmanuel Macron (2R), German Chancellor Angela Merkel (3R), EC designated president Ursula von der Leyen (L) and Italian president Sergio Mattarella (2L) at the farewell ceremony, Frankfurt, 28 October.
Monti never had such an opportunity. However, it is unlikely, regardless of the situation Covid-19 has created, that there is any one person who can successfully undo the web of complexity in Italy’s political or economic system. There has to be a desire by those in power to undo their own power. That is rare anywhere and there’s little to demonstrate it may be found in Rome. Italian politicians will again be the undoing of Italy’s efforts to reform.
I have lots of hopes and dreams for Italy because if anyone could address the challenges, it would Draghi. However, I also have lots of hopes and dreams for driving a Vespa around in perpetual sunshine. What I know is Italian bond yields aren’t a one-way ticket and I live in rainy, cold, grey England. Draghi isn’t the first technocratic government that was lauded as a saviour and it is unlikely he will be the last.
Feel free to file under THOUGHTS AND PRAYERS ITALY