In 2012, the former European Central Bank chief won international acclaim after pledging to do “whatever it takes” to save the euro from collapse, a promise that served as a turning point in the continent’s sovereign debt crisis.
Now, Draghi faces a different, if equally daunting challenge: steering Italy’s recovery from the coronavirus pandemic.
Draghi takes the reins of an economy that was still struggling to recover from the 2008 global financial crisis when the pandemic hit. In 2019, economic output grew by just 0.3% over the previous year, compared to 1.6% for the European Union as a whole.
“Italy’s most important, fundamental problem is they haven’t grown enough for so many years,” said Erik Nielsen, chief economist at the Italian bank UniCredit.
“While some Member States are expected to see the distance to their pre-crisis output levels close by the end of 2021, others are forecast to take longer,” the Commission said in a forecast released last week. “This is particularly the case for Spain and Italy, which are not expected to reach those levels by the end of .”
Yet Draghi has one advantage many of his predecessors lacked: a mandate to spend big. EU fiscal rules have been relaxed, richer member states are handing over money and Brussels is borrowing on Italy’s behalf.
Italy’s debt-to-GDP ratio stands at 154%, second in Europe only to Greece, and debt servicing costs a big chunk of the country’s budget. But the European Central Bank has made debt extremely cheap by pushing interest rates into negative territory and launching a massive bond-buying program, Nielsen noted. That gives Draghi significant leeway.
“He won’t have to implement draconian austerity programs,” Federico Santi, a senior analyst at Eurasia Group, said in a research note last week. “Rather, the new government will benefit from record-low borrowing costs and large-scale EU financing, while the EU remains supportive of fiscal stimulus for now.”
An ‘extraordinary’ opportunity
Just how Draghi chooses to spend on Italy’s recovery could define his tenure and the country’s future for years to come.
Nielsen said it’s crucial that Draghi immediately push for another round of spending and tax cuts to get the country’s economy back on track.
Embedded in this effort should be policies to address problems such as low participation in the labor force, which weighs on productivity, he…
Go to the news source: Mario Draghi saved the euro. Fixing Italy’s economy may be a bigger challenge