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Italy, and Europe, Look to Mario Draghi to Solve Another Crisis

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ROME—

Mario Draghi,

the former head of the European Central Bank, won wide praise from financial markets and the European Union after he defused the continent’s debt crisis by promising to do “whatever it takes” to save the euro.

That could turn out to be the easy part. Mr. Draghi must now show he has what it takes to become Italy’s next prime minister, convince the country’s fractious parties to back him, and reverse a long economic decline in the depths of the worst pandemic in a century.

The euro’s future could once again hinge on how Mr. Draghi fares. The eurozone’s third-biggest economy after Germany and France is also its biggest long-term problem. Italy’s debts are high, its growth is chronically low and its society is increasingly frustrated.

Since Brexit, the EU political establishment has cast a nervous eye at Italian public opinion, which used to see Europe as the answer to Italy’s woes, but now sometimes sees the EU and the euro as part of the problem. Mr. Draghi, a believer in the European project, will try to convince Italians that their problems are homemade.

Fixing Italy’s economy is a puzzle that has defied the best efforts of many well-regarded technocrats and reform-minded politicians over the past quarter-century.

“Consciousness of the emergency entails answers that are up to the challenge,” Mr. Draghi said Wednesday after Italy’s head of state, President

Sergio Mattarella,

tasked him with forming a government. “Defeating the pandemic, completing the vaccination campaign, offering answers to the daily problems of citizens, reviving the country, are the challenges ahead of us.”

First, however, Mr. Draghi must persuade a majority of lawmakers in a fragmented Parliament to support him. So far, only centrist parties have come out publicly in support, despite Mr. Mattarella’s appeal for unity across partisan divides. To become prime minister, Mr. Draghi will need the support of the populist 5 Star Movement or the nationalist League. Both parties have long railed against Italy’s habit of appointing governments led by economists and technocrats such as Mr. Draghi.

Financial markets, however, hailed the nomination of the ex-ECB chief, known as “Super Mario.” Milan’s stock market rose, and the risk premium on Italian government bonds compared with supersafe German bonds declined to the lowest level for nearly five years.

Mr. Draghi’s main assets, besides his high personal reputation, include the more than 200 billion euros, equivalent to $240 billion, in economic-recovery funds promised to Italy by the EU. Europe’s massive recovery fund was built last year mainly because Berlin, Paris and other key EU capitals feared that the Covid-19 pandemic could lead to a lasting economic depression in Italy and other parts of Southern Europe. Coming less than a decade after the economic pain of the eurozone debt crisis, such an outcome could be politically explosive for the bloc, EU leaders feared.

Fragmented

Mario Draghi needs more support to become Italy’s prime minister.

Italy’s lower house of parliament, current seats by party and support for or against Mario Draghi

191

5 Star Movement

(eclectic)

28

Italia Viva

(centrist)

93

Democratic Party

(center-left)

50

Mixed group

(eclectic)

91

Forza Italia

(center-right)

33

Brothers of Italy

(far-right)

191

5 Star Movement

(eclectic)

28

Italia Viva

(centrist)

93

Democratic Party

(center-left)

50

Mixed group

(eclectic)

91

Forza Italia

(center-right)

33

Brothers of Italy

(far-right)

191

5 Star

Movement

(eclectic)

28

Italia

Viva

(centrist)

93

Democratic

Party

(center-left)

50

Mixed

group

(eclectic)

91

Forza

Italia

(center-right)

33

Brothers

of Italy

(far-right)

33

Brothers of Italy

(far-right)

91

Forza Italia

(center-right)

28

Italia Viva

(centrist)

50

Mixed group

(eclectic)

191

5 Star Movement

(eclectic)

93

Democratic Party

(center-left)

But Italy’s last government couldn’t agree on how to use the money, contributing to its collapse earlier this month. Other EU capitals, having agreed to the funding, looked askance at the political crisis in Rome, and are likely to be relieved if Mr. Draghi succeeds in taking over.

Mr. Draghi has argued that the EU funds, if used for growth-boosting investments, could be the key to reviving Italy’s economy and making its debts sustainable.

“We have the extraordinary European resources at our disposal. We have the opportunity to do a lot for our country,” he said Wednesday.

If Mr. Draghi can’t find enough support in Parliament, then Italy is likely headed for snap elections. Most of the political class wants to avoid that in the midst of the Covid-19. Mr. Mattarella has warned that elections could also delay crucial action on the economy and the pandemic for months.

Italy’s Political Crisis

Italy’s deep-seated economic problems include a lack of productivity growth going back to the 1990s. Economists and business people point to many factors that hold back innovation and productive investment: a thicket of bureaucracy and permits, complex and contradictory laws, a sclerotic court system, underfunded and outdated universities, public-sector corruption, political instability that hinders policy-making for the long term, poverty and underdevelopment in Italy’s south, and a business sector with a surfeit of tiny family-owned companies, often run by aging and risk-averse founders.

Italy’s economy contracted nearly 9{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} in 2020, one of the worst slumps in Europe, on the impact of the Covid-19 and lengthy lockdowns. Its national debt is rising toward 160{f08ff3a0ad7db12f5b424ba38f473ff67b97b420df338baa81683bbacd458fca} of gross domestic product, the EU’s second-highest ratio after Greece.

The last time a technocrat led Italy, the results were mixed.

Mario Monti,

a respected economist and former EU official, is remembered for inflicting painful fiscal austerity during the eurozone crisis. Mr. Monti’s tough policies may have helped restore some of Italy’s credibility with bond markets and EU authorities, but his tax increases also deepened Italy’s recession, while his structural overhauls did little to improve Italy’s long-term growth performance. The experience turned many Italian voters against rule by technocrats, and helped fuel the growth of populist, antiestablishment parties.

Mr. Draghi is acutely aware of Italians’ skeptical view of technocrat-led governments, and has been reluctant to enter the political fray, according to people familiar with his thinking. But after departing Prime Minister

Giuseppe Conte’s

government collapsed this month, Italy had few other credible leaders to turn to.

Write to Marcus Walker at [email protected] and Giovanni Legorano at [email protected]

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