Mario Draghi’s €200bn Italian gamble has failed

Italian politics is about to get as messy as the UK version (okay, ok, maybe not quite as crazy). Mario Draghi’s government is on the brink of collapse this weekend. The former President of the European Central Bank has already submitted his resignation.

Italy’s president has so far rejected this. But without a majority in Parliament for his anti-inflation plans and calls for more debt to subsidize struggling budgets, it’s hard to see how much longer he can hold out. At best, he will limp until next year’s elections, but only as a lame duck, with no real power.

True, Italian politics is often chaotic. But step back and look at the bigger picture, and it was clear that the Draghi project was meant to transform the country’s economy and finally secure its place in the single currency. After bringing Draghi to power in February last year, the European Union finally mustered the political will to give the country the help it needed to break out of the low-growth, high-debt trap it has been locked in has been trapped for twenty years.

Italy received by far the largest share of the massive Coronavirus Recovery Fund, funded in large part by the EU’s first jointly-issued debt instruments. It received €220 billion despite being only the third largest country in the zone and not being hit much harder by the virus than anyone else.

The purpose was clear. Draghi would use the money to rebuild Italy’s economy and create the higher growth that would make its debt manageable. It “is the biggest stimulus package in the history of the EU and Italy gets the largest share,” EU President Ursula von der Leyen tweeted when the deal was struck. “We put the strength of our Union at the service of Italy’s recovery.”

It wasn’t a completely crazy idea. At the turn of the century, Italy locked itself into a monetary union with Germany and France at an uncompetitive exchange rate and with debt exceeding 100 percent of GDP. It was locked in perpetual austerity, killing the possibility of reform and doomed to sluggish growth that only added to the debt burden. It was the most vicious of all vicious circles. With some cash to play with, Draghi planned to streamline a bloated public sector, invest in technology and break down barriers to business. The result? Italy would have sustained higher growth and steadily lower debt as a percentage of GDP.

And yet, for now, the results are bleak. Inflation has skyrocketed as it has across the continent. Growth has stalled and a recession now seems inevitable as the overall global economy slows. Worse still, Italy is the country, after Germany, most dependent on Russian gas to turn on the lights (it made up 40 percent of its energy before the Ukraine war began). Mario Draghi’s €200bn Italian gamble has failed

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