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MARIO DRAGHI, NEW ITALIAN PM: 'S CHANCE FOR RECOVERY?

By Andrea Aguirre & Ludovico Frigo

T A B L E O F C O N T E N T S Abstract

Following the resignation from former Prime Minister Giuseppe ITALY'S OVERVIEW Conte on February 3rd and after a week of talks and negotiations with all the political forces, Mario Draghi accepted the proposal from the , , to be appointed as the 30th at the head of the 67th Italian BACKGROUND ON government since 1946. MARIO DRAGHI Former president of the of Italy and of the European , Mario Draghi has a brilliant record and is mainly known for his ability to work under pressure- the crisis context in 2012 ITALY'S RECOVERY PLAN being one. This time, “Super Mario”- the nickname that several media platforms associated him with - will have to take up another relevant challenge: coming to the rescue of Italy. His native country " D R A G H I E F F E C T " O N has been facing significant economic and political difficulties since F I N A N C I A L M A R K E T S the late 2000s and has seen its position aggravating due to the COVID-19 crisis.

Will Mario Draghi succeed in his first-ever government position and lead Italy towards an economic recovery?

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Italy's overview

Italy’s economy, the third largest in the euro zone, Nevertheless, Italy’s next government is expected has been anemic for a long time. In the past, to change the economic situation of the country. Italy’s economy was based on transforming raw On February, Prime Minister materials into products to be sold abroad just like resigned after he lost his governing majority in many other European countries. Based on the Senate due to poor covid-19 pandemic industry classification, the Italy economy is management and attendant economic recession. segmented into automobile, food and beverage, The named Prime Minister is Mario Draghi, aviation and others. With globalization, the known for his remarkable experiences which opportunity for Italian goods to be successful in seems to be exactly what Italy needs. world markets was reduced since developing countries gained larger stakes in exporting goods Background to areas in Europe. Nevertheless, the country did on Mario Draghi not count with a workable and stable political coalition, which can be considered as the roof of After graduating in Economics from La Sapienza the problems. University in , Mario Draghi received a Italy struggles between two power groups: Ph.D. in Economics from the Massachusetts Eurosceptic populists and pro-EU lawmakers. The Institute of Technology in 1976. Later, he taught radical right populist parties attempt to leave the in several universities and worked for the World or re-found it to completely Bank in the 1980s. Among the significant job change it, while the left-wing populist parties positions, Draghi was appointed Director-General present a constructive discourse. In Italy, the 5 of the Italian Treasury from 1991 to 2001. During Star Movement was the most voted political this period, he focused on reducing Italy’s public option in the 2018 elections. The party was born debt through stabilizing interest rates and in 2009 as an "anti-political movement", but the currency exchange rates. This was a crucial step reality is that after entering in Parliament after taken to make the Italian economy ready to enter the February 2013 elections, it became a political the European monetary union of 1999. Among party. other positions, Draghi was named President of The movement attributes all responsibility about the in December 29, 2005. He what happens in Europe to the European adopted a strict for the country Parliament since they are responsible for the to keep up with the challenges of the euro mismanagement of issues such as the economic currency project. In November 2011, Mario crisis. This movement generated a strong Draghi became the president of the European disaffection among citizens concerning the Central Bank. European political project.

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Euro crisis

When Mario Draghi stepped in as president of the Fiscal positions and debt levels of these ECB, the financial crisis was already European countries were unsustainable and well underway, to the point that Greece was close looked particular alarming to the eyes of many to giving up the currency. political and economic entities, and to investors. The took place in the (BBC, 2019) As a consequence, lenders started to European Union starting from late 2009. In the demand higher interest rates to PIIGS wake of the 2008 , many governments, their borrowing costs were governments were facing increasing structural soaring to unsustainable levels and this deficits and worrying debt levels. contributed to worsen the ability of the countries This situation was particularly exacerbated by the to repay their debt and hence, jeopardizing the interest rate system that had been set up by the whole system. ECB at the time, incentivizing Southern European countries to repeatedly borrow from Northern European countries at particularly low interest rate levels. (Investopedia) In that context, the acronym PIIGS emerged, designing Portugal, Ireland, Italy, Greece and Spain as European member states that would not have been capable of repaying their government debt without the external aid from a financial institution.

As shown by the graph (ECB), government securities yield skyrocketed in late 2010 all above 6% for PIIGS, indicating that financial The previous graph (stats.areppim.com) displays institutions were having serious doubts the evolution of the PIIGS’ debt-to-GDP ratio regarding the creditworthiness of those between 2005 and 2010. A rapid and alarming countries. Pressure on the markets was severe, growth causing the ratio to reach 142% for the European Union could have potentially Greece, 119% for Italy, 96% for Ireland and 83% survived a Greek exit from the Eurozone, but in for Portugal, figures well above the European the case of Italy or Spain, this could have Union average set at 79.6% in 2010. (Eurostat) marked an end to the Euro. (BBC, 2019)

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This was the extremely challenging context in Following that historical date, Mario Draghi which the European Union was stagnating when pulled the trigger on a set of expansionary Mario Draghi took office as a successor of Jean- monetary policy measures known as quantitative Claude Trichet at the head of the ECB. easing, a form of monetary policy frequently Starting from December 2011, the ECB began a undergone by the . (KfW three-year loan program directed at EU Research) The ECB rescue plan that carried the which amounted for €489 billion, with the aim of name of “outright monetary transactions” easing the crisis. (OMTs) consisted in buying the bonds and debts of the PIIGS governments to alleviate the fiscal pressure of these countries. As a result, these "Whatever it takes" measures led to a steady decline in the yield of Despite the financial aid from the ECB, the PIIGS’ securities as shown by the following situation did not seem to improve and, on the graph and hence making their debt more contrary, renewed fears concerning sovereign manageable. debts and the Eurozone crisis in 2012 were marking the beginning of Mario Draghi’s mandate. It was probably the most difficult moment that the EU had ever faced, but the president knew that the ECB could not give up. Instead, he decided to make it clear to the entire world that he would have done his best to preserve the Eurozone, creating a general wave of optimism. July 26, 2012 is definitely a date that the European Union and Mario Draghi will hardly These bold moves from Mario Draghi and the forget. During the Global Investment Conference ECB created the conditions for ending the in London, he delivered a speech that highlighted sovereign debt crisis and for building the the strong commitment of the ECB to save foundations of a continuous eurozone economic Europe and the euro area. Throughout the growth starting from the second quarter of 2013. discussion, he stated that “Within our mandate, (BBC, 2019) the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough”. (ecb.europa.eu, 2012) This statement received international acclaim and served as turning point in the European sovereign debt crisis. Another issue that is still present in the eurozone is inflation.

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Inflation and Draghi’s late mandate

When the ECB was a new central bank, it However, any economy needs banks to be operated in a very heterogeneous monetary union, commercially viable if they are to provide the which made it essential to establish inflation credit that business and consumers need. There credibility. Establishing a commitment to is another view which mentions that interest controlling inflation was seen as critical to rates and QE cannot fix the problem. Mr. Draghi, cement lower inflation expectations across the his successor , and many euro area. For this, in 1998, the ECB’s objective others have suggested that governments need to for price stability was set to be inflation with do more. They argue that those countries that range of 0 to 2% over the medium term. have room to spend more should do so to provide the eurozone economy with some stimulus, and in particular with the current COVID-19 crisis.

Italy's recovery plan

The new challenge of “Super Mario” now consists in steering Italy’s recovery from the coronavirus pandemic. After years of economic and political malaise, Draghi will have to take up The ECB under Mr. Draghi's leadership took some the daunting task of managing and allocating the dramatic steps to tackle the problem. There has €209 billions that are destined to Italy as part of been , buying financial assets, the Recovery Plan for Europe-€81.4 billion mainly government bonds, with newly created grants and €127.4 billion low-interest loans. money. In January 2015, the ECB initiated the (ilsole24ore, 2020) quantitative easing through the asset-backed Finalizing the plan on how these European securities purchase program (ABSPP) and the resources will be spent could define the tenure of covered bond purchase program (CBPP3). The the former ECB president, and could mark a combined monthly purchases amounted to €60 turnaround in Italian politics as the previous billion, and they were carried out until September government failed at achieving that task. 2016, until the Governing Council saw a sustained Coupled with NextGenerationEU, the Recovery adjustment in the path of inflation (ECB, 2015). Plan amounts for €1.8 trillion in total and will be Despite efforts to enhance inflation levels, it the largest stimulus package to be ever financed remains below the ECB’s target and bank’s from the European Union in 28 years of history. negative interest rate policy is also criticized.

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Frequently associated to the post-WWII Marshall In addition to that, the Italian Prime Minister is plan, it will consist in low-interest loans and facing tight deadlines since he will have to grants with the aim of helping to rebuild a post- present the Italian National Recovery and COVID-19-Europe which will be greener, more Resilience Plan (NRRP) to the European digital and more resilient (ec.europa.eu 2021) Commission by April 30th in order to have The financial framework of this relief package access to the €209 billion funds. will be diluted over the 2021-2027 timeframe and This will represent a major challenge for the will be constituted as follows. new-born Italian government, but Mario Draghi is aware of how crucial it is to define a precise, long-term strategy on how that money will be allocated as it is likely to shape the future of his native country for years to come. Few days after his appointing, in the beginning of February, the former ECB president stated: “We have at our disposition the extraordinary resources of the European Union. We have the opportunity to do a lot for our country, with a careful eye on the future generation." A clear, direct message that elicits hope for future recovery, economic growth and rise in employment levels, and at the same highlights the importance of focusing on Italian’s youth, often left behind.

"Draghi effect" on financial markets The Recovery Plan pays particular attention to six major elements of agreement that are Bond market digitalisation, green revolution and ecological Government securities 10-years yields reflect transition, infrastructures for sustainable investors’ confidence in a given country. When a mobility, education and research, inclusion and country is expected to perform particularly well, cohesion and healthcare. (mef.gov.it) as a result of the risk-return tradeoff, 10-years These are the strict guidelines that the plan that yields generally fall and on the contrary, when Mario Draghi will have to deliver is expected to investors lose confidence in a country’s future address. performances, 10-years yields generally increase.

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Government securities 10-years yields reflect Starting from February 3rd, the day when the investors’ confidence in a given country. When a President of Italy Sergio Mattarella asked Mario country is expected to perform particularly well, Draghi to start forming a new government, the as a result of the risk-return tradeoff, 10-years spread started to drop reaching 89.290 bp on yields generally fall and on the contrary, when February 16th, few days after that Mario Draghi investors lose confidence in a country’s future had been appointed as 30th Prime Minister of performances, 10-years yields generally increase. Italy. The Italian government bonds are the BTPs “Buono del Tesoro poliennale” and like for the majority of the European countries, their performance is benchmarked to the German Bunds, since Germany is the European country with the strongest financial position. In the case of Italy, the spread BTP-Bund has always been floating in the range 100-300 basis points (Borsa Italiana), reflecting the significant financial disparity between the two countries. (N.B. Italy and Germany’s sovereign ratings Despite BTP-Bund spread levels went back to respectively are BBB- and AAA) over 100 bp in the recent days, investors generally agree that this was caused by a general fear about the return of inflation and the rise in US T-bonds’ yield following the speeches from Fed Chair Powell. Hence, the spread is expected to float below 100 bp in the upcoming months thanks to the Draghi effect.

Stock market Financials are the biggest sector among Italian large and mid-cap firms and consumer However, in the past month and for the first time discretionary stocks make up the third-largest since 2015, the spread has broken the 100 bp sector. The FTSE MIB, Italy’s main stock market “resistance”, this being essentially due to what index, has risen about 7% from a low on January investors and banks referred to as “Draghi 29 on the back of Draghi’s appointment, and effect”. experts believe there is room for potential growth. On February 2nd, the spread BTP-Bund was at Mislav Matejka, head of global and European 116.220 bp. equity strategy at JPMorgan, said that Draghi’s policies are “bullish for the Italian equity market, through .

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tighter peripheral spreads, greater policy “The economy doesn’t contract, it doesn’t grow. credibility and the bottoming out in activity Italy is a country that is weak, that is old, where momentum, helped by the strong fiscal support.” there is no investment in new ideas.” Still, after analysts predicted MSCI’s Italy reviewing Mario Draghi’s background, index would outperform MSCI EMU by 10-15% led experience and understanding of the economy, by banks. Indeed, shares of Italy’s banks were we strongly believe that he is the most suited among the biggest winners with Draghi’s new figure to carry on Italy throughout these government. Intesa Sanpaolo surged 5.83% on the turbulent times. His success as ECB president, stock exchange, Banco BPM was up 4.55%, especially his key role in overcoming the and UniCredt climbed 4.72% (Market Insider, European sovereign debt crisis of 2010-12, is a 2021). On the other hand, improving perceptions signal to other countries and to financial around Italy could dovetail with the expected markets that Italy is in the safest possible hands. economic rebound from the COVID-19 pandemic, Morgan Stanley analysts said, adding that a more than 30% outperformance was “not implausible”.

Indeed, the appointing of the former ECB president was positively perceived by the financial system that believes that Mario Draghi is the right person to allocate the money of the Italian Recovery Plan and to carry out Italy from the economic crisis it has been stagnating in for more than a decade.

Conclusion

Mario Draghi’s acceptance of the proposal from the president of Italy has led the country to a new wave of opportunities and optimism. However, he will have to take up the several challenges from the way Italy has structured its economy throughout the past decades. This was highlighted by Nicola Borri, a finance professor at Luiss University in Rome, during an interview with the CNBC.

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