Draghi Hauled Out of Retirement to Lead Italy in Hour of Need

(Bloomberg) -- Mario Draghi managed to keep the euro together at the height of the continent's sovereign debt crisis, and his next job might require a similar feat.

The former European Central Bank president, credited with saving the single currency with his 2012 pledge to do “whatever it takes,” is set to lead Italy's 13th government of the current century at a time of unprecedented turmoil.

Draghi's challenge is a daunting one. The country's explosive combination of rising debt, stagnant growth and simmering hostility toward elites has long made it the weak link in the euro area. Meanwhile the battering Italy has taken from the coronavirus in the past year has left the economy on its knees.

“This is basically wartime,” Davide Serra, chief executive officer at Algebris, told Bloomberg Television. “There's no better leader Italy can put in at this point in time.”

That sentiment shows the weight of hopes being placed on the former central banker.
Draghi will need deft footwork and all his skills honed in the backroom dealing of global finance as he joins the rough-and-tumble of national politics for the first time.

Success may depend on how far he can leverage the credibility founded in his old position to push through a recovery and lead a program of economic reforms, at the helm of a government besieged by lawmakers happy to stoke anger against technocrats like him.

Early reactions to President Sergio Mattarella's plea for the 73-year-old to succeed Giuseppe Conte as premier hint at the scale of the task. The Five Star Movement, the largest force in parliament, risks splintering over whether to support him, while far-right leader Giorgia Meloni has called for snap elections. Matteo Salvini's League is lukewarm, and even the moderate Democrats have reservations.

“I am confident that from the meetings with parties and parliamentary groups, and from dialog with the civil society, unity will emerge and with it the ability to give a responsible and positive response to the appeal of the president,” the new prime minister told reporters in Rome on Wednesday.

Draghi is drawing on political acumen developed through years navigating Italy's corridors of power as a Treasury official and central bank governor, and as an ECB chief who steered through controversial policies and outmaneuvered Germany's Bundesbank.

“There is still much disagreement in Italian politics, and the more popular parties are those with less euro-friendly views,” said James Athey, investment director for Aberdeen Asset Management. “But markets are expecting Draghi to work his magic again.”

Forging a majority among lawmakers -- many of whom are wary of early elections -- may turn out to be the easy part. Much harder will be winning the confidence of citizens deeply skeptical of the technocrats that have been repeatedly tapped to run the country in recent years.

What Bloomberg Economics Says

“Political instability and economic woes are here to stay for the monetary union's weakest link -- appointing an establishment figure to lead a divided country won't change that.”

-David Powell and Maeva Cousin. For full note, click here.

To shift such views, Draghi might have to modify his style. At the ECB, he tended to listen to all but seldom spoke his mind, sometimes cutting short lengthy meetings or even slipping out unnoticed. That's something he won't be able to do during the long talks with allies and dignitaries that punctuate the days of Italian prime ministers.

Draghi might have an easier time in reassuring financial markets in the short term as the ECB continues to keep a lid on Italy's bond yields. Convincing investors that low productivity, poor demographics, cumbersome bureaucracy and widespread corruption are surmountable will ultimately be a tough sell however.

Good Faith

“I'm not sure that it's going to be that easy to change the long-term fundamental outlook about Italy,” Mike Bell, a strategist at JP Morgan Asset Management, told Bloomberg Television. Still, “Draghi was the man who stepped in and almost singlehandedly saved the euro zone back in 2012, and so he carries good faith.”

How the new premier expends that faith may be crucial to Italy's destiny as it shakes off the coronavirus. In rare comments since leaving the ECB, Draghi already hinted at his priorities, suggesting that governments should favor growth over fiscal rectitude, and that debts shouldn't be a reason to avoid expansionary policies that can avert a devastating recession.

But he also warned of dangers, especially now that Italy has 200 billion euros ($241 billion) of European Union funds to spend revamping its economy. Such an opportunity also carries risks for a country saddled with record borrowings -- if “debt is used for unproductive purposes, it will be seen as ‘bad' debt and its sustainability will be eroded,” he said.

Draghi has limited time to succeed, with elections due in just over two years. His tenure could be shorter than that if he is chosen by lawmakers to replace Mattarella as president early next year, though it won't be easy to end a job only half-done.

The former ECB chief will be only too aware of the danger to his legacy. Looming over his government is the memory of Mario Monti, the former European commissioner who was tapped as premier during the sovereign debt crisis and is still despised by many for the austerity he imposed.

Still, Draghi can hardly refuse to step in now at the hour of Italy's need, and it wouldn't be his style either. As he told an audience in Frankfurt, just as he was poised to take up his role at the ECB: “Friends tell me that I rarely shy away from impossible tasks.”

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