Italy turns to recent European Bank chief Draghi to try and form next government

Former European Central Bank chief Mario Draghi agreed Wednesday to try to form a non-political government to steer Italy through the coronavirus pandemic after last-ditch negotiations among political parties failed to produce a viable governing coalition.

Italian President Sergio Mattarella met with Draghi, who is credited with having saved the euro during Europe’s debt crisis, and gave him a mandate to try to form a new government to replace caretaker Prime Minister Giuseppe Conte’s coalition of the 5-Star Movement and Democratic Party.

Draghi told reporters he accepted the mandate knowing that Italy faces the multiple challenges of a health-care crisis, a national vaccination campaign and an economic recession, and at the same time will have “extraordinary” resources from the European Union to try to help the economy relaunch.

“It’s a difficult moment,” Draghi, 73, said.

Appealing for unity from Italy’s squabbling political forces, he said: “We have the chance to do a lot for our country.”

Conte was forced to resign last month after ex-prime minister Matteo Renzi pulled ministers of his small, centrist Italy Alive party from Conte’s government. Renzi, whose nickname is “il rottamatore,” or “the demolisher,” complained among other things about Conte’s plan to spend more than 200 billion euros ($307 billion Cdn) in EU pandemic recovery funds and loans.

‘Draghi to the rescue’

During his tenure at the European Central Bank, Draghi became known as “Super Mario.” He had been rumoured as a possible choice to lead a non-political government if Conte was unable to find enough parliamentary support to continue leading Italy. Negotiations among political parties failed Tuesday.

“Draghi to the rescue,” said Christopher Dembik, senior European economist at Germany’s Berenberg bank, predicting that Draghi would eventually succeed in forming a broad-based government.

Giuseppe Conte was in academia when he was tapped to lead Itay’s government as prime minister in 2018. Conte in recent weeks could not placate another former prime minister Matteo Renzi, leading to the dissolution of his governing coalition. (Yara Nardi/Reuters)

His greatest hurdle, though, will be securing support from the 5-Star Movement, the biggest political block in the Italian parliament and the senior partner in Conte’s government. The 5-Stars had insisted on Conte remaining prime minister and bitterly resented Renzi’s power play that brought him down.

Five-star leader Vito Crimi said the movement would only support a political government.

“As such, it will not vote in favour of a technical government headed by Mario Draghi,” Crimi said in a statement.

For the 5-Stars, a Draghi government imposed by Mattarella poses an almost existential dilemma. The anti-establishment, populist movement emerged as a potent political force in part as a response to Italy’s last technocratic government, led by Mario Monti, in 2011-2013.

Under Conte, the 5-Stars had led two successive governments starting in 2018, allying first with the right-wing League and then the centre-left Democrats.

Markets and analysts reacted positively to a possible Draghi mandate, with borrowing costs sinking and the Milan Stock Exchanges benchmark FTSE MIB index rallying 2.7 per cent in early trading. A government headed by a high-profile and respected figure like Draghi is “likely to be seen, especially by market investors, as a very good solution in the short term,” UniCredit analysts said in a note.

A sombre Mattarella told the nation Tuesday night that he essentially had no choice: While an early parliamentary election was a necessary “exercise in democracy,” calling one would be ill-advised at this crucial time in Italy’s history, the president said.

Squabble over recovery funds

Italy, with over 89,000 confirmed virus deaths, has the second-highest COVID-19 death toll in Europe after Britain. It is trying to ramp up its vaccination campaign and must report back to the EU on how it plans to spend the recovery funds.

“It is therefore my duty to make an appeal to all the forces in the parliament so that they grant the confidence to a high-profile government not linked to any political force,” Mattarella said.

Renzi, who was prime minister from 2014-2016, blamed Conte’s forces for the failed negotiations to find a new coalition and governing program, saying they had rejected his proposals. He made clear he was pleased with the outcome, praising Mattarella’s “wise” decision.

“Now everyone of goodwill must welcome President Mattarella’s appeal to support the government of Mario Draghi,” he said Wednesday. “Viva Italia.”

The right-wing opposition, which had been leading the polls prior to the government tumult, still pressed for an early election, though the Forza Italia party of ex-prime minister Silvio Berlusconi indicated its support for a “high-profile” government.

Draghi, a Massachusetts Institute of Technology-trained economist, led the Italian central bank from 2005-2011, when he was tapped to lead the European Central Bank, a job he held until 2019. Prior to that, he had been a vice-chairman and managing director at Goldman Sachs International in London and an executive director at the World Bank.

He is perhaps best known for his intervention as ECB chief during the peak of Europe’s debt crisis in 2012. As Italy was facing unsustainably high borrowing costs that threatened its financial stability, Draghi said in July 2012 that the central bank was ready to do “whatever it takes” within its mandate to preserve the euro.

It proved to be a turning point for Europe.

Italy, the third-largest economy in the European Union, nevertheless had been heading into a recession even before it became the first country in the West to be hit hard by COVID-19 last February. The ensuing economic devastation has only made matters worse, with gross domestic product falling 8.8 per cent last year and nearly 450,000 jobs lost, national statistics agency ISTAT reported this week.

Italy’s borrowing costs in respect to the benchmark German bund dropped considerably on Wednesday, signalling markets’ approval of Draghi as Italy faces the enormous task of spending billions in EU recovery funds. Italy needs to turn to the markets regularly to keep up with payments on the second-highest debt to gross domestic product ratio in the eurozone. Italy has historically been unable to spend all the EU funds at its disposition due to its inefficient bureaucracy.

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