Mario Draghi managed to keep the euro together at the height of the sovereign-debt crisis but he failed to keep Italian political parties in line -- just as the euro-zone grapples with a new energy and inflation crisis.
The premier resigned Thursday after three coalition allies withdrew their support for his government, shattering the unity which had propelled him into office in February 2021.
The timing couldn’t be worse. His resignation came on the day the European Central Bank he once headed raised its key interest rate by 50 basis points, the first increase in 11 years. ECB President Christine Lagarde and colleagues also unveiled a tool they hope will ensure markets don’t push up borrowing costs too aggressively in vulnerable economies.
Italian bonds, which had sunk after Draghi’s resignation, plunged following the ECB’s move. The European economy is facing record inflation, slowing growth and energy shortages after Russia’s invasion of Ukraine putting investors on edge.
Ironically, his exit from power comes shortly before the tenth anniversary of his pledge on July 26, 2012, to do “whatever it takes” to keep the single currency in place.
When he became prime minister, Draghi offered a boon to markets because he brought an impetus for reforms and temporary stability to Italy’s notoriously unstable politics. A fresh bout of turbulence in Italian bonds will make it harder for the ECB to tighten monetary policy without creating fresh strains within the currency union.
The 74-year-old was picked by President Sergio Mattarella to head Italy’s 67th government since World War II after parties failed to resolve a political impasse. He quickly set about revamping a stagnant economy which stil needed to recover ground lost to the Covid-19 pandemic.
Spending Sensibly
Under his technocratic stewardship, Italy engaged in an initial reform spurt tied to an effort to spend European Union recovery cash sensibly. The economy grew in the first quarter of this year faster than economists predicted and outpaced its European peers in the second quarter.
All of that is now called into question after weeks of mounting political tensions which started when the Five Star Movement, a key coalition ally, refused to back Draghi in a confidence vote on July 14. The climax was a day-long Senate session of heated debate in which Draghi tried to reimpose his authority, setting out his terms for continuing in power before he was abandoned by his former partners.
The premier himself seemed to sense the crisis ahead when he spoke at a foreign press dinner in Rome on July 12. Standing under majestic pine trees in the gardens of a 17th century villa, he listed his efforts to change Italy, a kind of testament to his year and a half in office leading the euro area’s third-biggest economy.
Targets Met
He noted how all EU recovery fund targets so far have been met, a prerequisite to unlock about 200 billion euros ($204 billion) of grants and loans. That’s no small task in a nation known for failing to spend, or for badly spending European funds in the past. A reform of the judicial system aimed to shorten Italy’s lengthy legal processes which discourage foreign investments, and competition and fiscal reforms were underway.
“The economy has improved, but let’s not get too comfortable,” Draghi said, hinting at likely difficult times ahead amid surging energy prices. The end of his government was just a week away.
Though a technocrat, Draghi doesn’t lack political acumen after years of navigating the Italian establishment as a Treasury official, then as Italy’s central bank governor and finally as an ECB chief who at times managed to outmaneuver Germany’s Bundesbank.
But his hardline approach to parties and working method did not always go down well in Rome’s byzantine political games, making his exit abrupt.
“Draghi has been painstakingly repairing the country one step at a time and many of the fundamentals are better,” said Rosamaria Bitetti, an economist and lecturer at Luiss university in Rome. “But he had little time, long-term issues like productivity remain and a lot of the work done is hasty patch-ups. Much more is needed.”
As he took his leave of lawmakers Thursday morning before heading to the presidential palace to resign, Draghi appeared emotional when ministers gave him a standing ovation. “Sometimes also central bankers have a heart,” he said.
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