Italy Politics February 2021

Italy

Italy: Draghi's new government expected to deliver EU investment plans but no strong reforms in sight

February 26, 2021

Former president of the European Central Bank Mario Draghi was sworn in as Italy’s new prime minister on 13 February. Draghi managed to form a national unity government whose main task will be to marshal a recovery from the Covid-19 crisis, which has severely hit the Mediterranean country. The new government will have to draw up investment plans necessary to receive almost EUR 210 billion from the so-called Next Generation EU recovery program, which Draghi has already said will be spent on digitalization, green technologies, healthcare, research and development, and education and training. Moreover, Draghi announced he will deliver a series of reforms which, together with the EU funds, will help to kickstart the economic recovery, increase growth potential and therefore also strengthen longer-term sustainability of the country’s mountainous stock of public debt. That said, the likelihood of implementing these controversial, albeit much-needed, reforms seems quite low given the government’s heterogeneous political backing.



Although Draghi can count on the support of a large coalition, its assorted nature could make governability bumpy in the longer term. He managed to secure the backing of all the coalition parties which had supported the previous government: the social-democratic Democratic Party; former prime minister Matteo Renzi’s center to center-left Italia Viva; the left-wing Free and Equal party; and the formerly anti-establishment, now left-wing populist, 5-Star Movement. Moreover, he managed to bring on board former prime minister Silvio Berlusconi’s center-right Forza Italia party and the right-wing Lega party, while the right-wing Brothers of Italy party was the only one that decided not to support the new government.



The new cabinet is formed of 25 members, including Draghi, 15 of whom belong to the parties supporting the government, while the rest are non-politicians. In particular, Daniele Franco, former director-general of the Bank of Italy, was appointed as finance minister; former Vodafone chief executive Vittorio Colao was named as the new innovation and technology minister; and the all-important, newly created Ministry for Ecological Transition (which will have to handle a sizable portion of the EU funds) was entrusted to the hands of Roberto Cingolani, former head of the Italian Institute of Technology. As well as handling EU funds, Draghi announced the cabinet will focus on reforming and streamlining the country’s cumbersome legal, public administration and tax systems.



Commenting on the likely duration of the newly formed government, Paolo Pizzoli, senior economist at ING, stated:



“The heterogeneous nature of the new government coalition might solicit ideologic calls on past flagship themes when divisive dossiers such as justice or migrants will eventually be tackled. However, overall, we believe that the overarching need to act quickly, both on the vaccination and on the RRF fronts, will in principle limit the scope for sterile wars of position among the different souls of the majority. It will not necessarily be easy sailing, but we expect that some form of auto-containment of dissent will eventually prevail, limiting the scope for the risk of another government crisis to become uncontrollable and an inevitable snap election the only possibility left.”



Meanwhile, Nicola Nobile, lead economist at Oxford Economics, struck a more pessimistic tone:



“We doubt that Draghi’s approach to managing the pandemic will differ substantially from the previous administration. Draghi’s real advantage as former President of the European Central Bank is his relationship with his EU peers. This could help the government to make headway on Italy’s plans for executing the EU recovery fund. Moreover, he could pave the way for other reforms that would help Italy to escape the stagnation that has stalked the economy for years. However, we doubt a Draghi government would last beyond the crisis period.”

Our Consensus Forecast panelists project the fiscal deficit to come in at 7.8% of GDP in 2021. For 2022, the panel sees the fiscal deficit at 5.2% of GDP.


Author: Massimo Bassetti, Senior Economist

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