Italy is a country that has faced numerous economic and social problems in the past decade, and has been struggling to integrate into the world economy. These problems include political volatility and excessive bureaucratism for firms, and have hindered economic progress for numerous decades as the country fell behind its European counterparts. One man who has the opportunity to change this is Mario Draghi, one of Italy’s most impressive economists, who has been given the once in a lifetime opportunity to fundamentally reshape the landscape of Italy. If he is able to navigate the ‘political labyrinth’, then we can be very optimistic for what Italy will have to contribute to Europe and the wider world in the coming years.
First of all, we can see the political volatility with the high number of prime ministers as the country has seen ten prime ministers come and go since the early 2000s. It is not unusual for most prime ministers to serve a term under two years, which has contributed to the lack of a long term vision for the country as laws are rather difficult to pass when coalitions break down so often. We can arguably observe the effects of this, such as through the incredibly high debt to GDP ratio of 160%, with little to show for in terms of successful investment projects. The past year has been, like for many other countries, the worst recession since WW2 with a GDP decline of 8.8%, which begs the question, can Italy turn things around?
A notable career
Mario Draghi has a breadth of experience, beginning with a career as an academic economist within the University of Trento, before moving to both the World Bank and Goldman Sachs. His most notable position is likely his role as the ECB president between 2011 and 2012, whereby he was able to save the Eurozone from crisis in 2012 through a mixture of technocratic and political skill, promising he would do “whatever it takes” to prevent collapse.
On February 13th, he was asked to serve as President of Italy amid a collapse in political talks between the parties. He is set to come in with an initially large political majority, and has set out his agenda as strongly pro-European with a technocratic focus. There are ambitious plans for the recovery from COVID-19, and he aims to resemble the methods of the post-war reconstruction.
One of the first moves led by Draghi was to raise capital by issuing government bonds, which was a huge success for the country, as the cost of borrowing for 10-year bond issuances was near the lowest on record. Overall, €110bn was raised, exceeding the previous €108bn, partly fuelled by EU relaxation of fiscal rules which allow the debt to GDP ratio to exceed 150%. Looking at the cost of borrowing, the Italy-German spread, the difference in the interest rate between Italy and Germany, shrunk to less than 0.9%, which is the lowest level in the past decade. Many expect this number could continue to fall to 0.75% or even 0.5% in the most optimistic scenario, partly on the basis that Draghi will be able to attain high returns on such investments.
Euro Emergency and Resilient Fund
In response to the economic troubles faced by member nations, the EU has set up an emergency resilience fund, avoiding the previous mistakes of austerity in times of recession arguably seen in the past. Italy is set to receive €200bn euros from it, and deciding exactly what to spend it on is no easy task, as the break-up of the previous government over this illustrates.
Draghi recently set out his vision on Wednesday for the areas that need the most attention and will serve the country best. Some of the key areas include reforming the education system to increase the length of the school year and follow the French model of providing a larger focus on vocational training, and protecting and supporting those who are at risk of losing their jobs. Gender inequality is also a particular issue in Italy, so reducing the wage gap and improving female opportunities in the economy is another priority. Italy’s track record when it comes to these funds does not instil confidence, with only 43% of the last available funds being spent in the appropriate manner, meaning there is a lot to prove to the rest of the EU if it is to continue to receive such support on the grounds of a recovery.
Business in Italy
Currently, operating in Italy presents many unnecessary challenges for firms, with a so-called ‘bureaucracy tax’ that leads to prices 10% higher compared to when the same company is located in neighbouring states. Recently, it ranked 58th in the world for ease of doing business, below both Kenya and Romania, in addition to having the slowest legal system in Europe, with legal cases taking on average 514 days, all of which contributes to a highly inefficient system that slows down economic activity significantly. Draghi’s reforms in this time of crisis offer a rare chance to structurally reform the way businesses operate in Italy, and if successful in doing so, could lead the country to play a much more influential role in the Eurozone as the potential domestic market share expands. Additionally, we could see a gradual shift from economic partnerships with China back to Europe as Draghi has set out to strengthen ties with the area.
Overall, Draghi has inspired a sense of optimism for the country’s future, with his high level of international experience and expertise being a rare blessing for Italy. There will of course be many challenges ahead, including maintaining cross party relations and having to change his communication style from technocratic to a more political tone, but the potential gains to be seen in all areas of the country are immense. When firms are considering potential areas for investment or expansion, Italy is increasingly likely to be of interest, which exhibits the expected progress many are beginning to expect of a country which has struggled to keep up.