Investor Alert

Feb. 3, 2021, 3:41 p.m. EST

Markets cheer prospects of Mario Draghi as Italian prime minister

By Pierre Briançon

The former president of the European Central Bank was invited on Wednesday by Italian President Sergio Mattarella to form a new government, after the resignation of Giuseppe Conte as prime minister last week.

  • Mattarella chose the option of a “technical” government over that of calling for general elections, which risked throwing Italian politics into renewed chaos in the middle of the COVID-19 pandemic.

  • The jumped more than 2% on Wednesday on the news, against a rise of 0.5% for the Europe 600 index.

  • Italy is the European Union country worst hit by the COVID-19 pandemic, with nearly 1,500 deaths per million inhabitants. Its economy shrank by more than 9% in 2020 and is expected to grow a meager 3% this year.

  • The previous government resigned after the coalition parties fell out on how best to spend some €200 billion of grants and low interest loans from the EU’s COVID recovery fund.

  • Italy’s public debt is expected to shoot up to 160% of gross domestic product this year, but the ECB’s asset-buying program has kept the country’s interest rates at historic lows, with yields on 10-year bonds (XTUP:BX:TMBMKIT-10Y) hovering around 0.6%.

Read: Italian assets lead Europe higher as investors hope for a ‘Super Mario’ rescue

The outlook: Draghi, if he accepts, will have to overcome the curse of Europe’s “technical” governments — they tend to fail. The former central banker is known for his no-nonsense decisiveness. But he is — so far — less popular in Italy than he is in the rest of Europe or on financial markets.

If he succeeds in forming a government, he can be expected to focus without waiting on both the immediate crisis and the management of European funds, and on the long-term structural reforms that he has long advocated for Italy.

But his premiership could also have far-ranging consequences for the EU itself. Draghi’s aura and gravitas will by itself change the balance of power among EU leaders, and end years of exclusive Franco-German influence. If, that is, his “technical” government succeeds.

Read: How Mario Draghi Could Change Italy—but Also Europe

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