Italy: Super Mario to the rescue?

Mario Draghi, former head of the European Central Bank (ECB), is credited with almost single-handedly saving the euro in the wake of the 2008 financial crisis with his famous “Whatever it takes” speech. Rome is now hoping that the veteran economist will do “whatever it takes” to pull Italy out of twin public health and economic crises.

Draghi already appears to have snatched Italy from the jaws of one crisis, the political feuding which was crystalized by opposition politician Matteo Renzi’s January decision to pull his support for the previous coalition government. With a tragically high coronavirus death rate and a devastating 10% GDP drop in 2020, the Italian government collapse was as welcome as a skunk at a garden party, and the spectre of a weak minority government or snap elections loomed large. As Renzi put it, Italy had no choice but “to call in the best player, because Mario is the best player”.

Indeed, the central banker nicknamed “Super Mario” has already succeeded where outgoing PM Giuseppe Conte failed. Where Conte’s bid to patch together support from unaffiliated lawmakers fell short, Draghi will command a solid majority as PM after earning the backing of the Five Star Movement. The widespread support for Draghi’s new government is a reflection of the economist’s impressive track record of crisis management. He certainly has his work cut out for him—Draghi’s first imperative must be to reverse misguided Conte-era policies which contributed to the last government’s collapse.

Kicking Conte’s spending habits

In priority, Draghi will need to address the questionable pet projects which fanned Renzi’s fears that Conte’s priorities were not in order—and that he might misspend Rome’s €209 billion chunk of the EU coronavirus recovery funds. In particular, two government initiatives raised questions: the proposed merger of broadband rivals TIM and Open Fiber, and the re-nationalisation of flag carrier Alitalia. In pushing these agenda items, Conte’s government seized on the EU’s relaxation of their strict framework on state aid in the wake of the devastation of coronavirus—no matter the fact that, as the former chief of Italy’s railway network noted,  “none of these files have anything to do with the pandemic”.

Draghi’s new government still has time to reverse course on Conte’s plan to tie up former telecom monopolist TIM and wholesale competitor Open Fiber—and many will be hoping for him to do so. Consumer groups have already flagged the potential fusion as “quasi-monopolistic”, raising particular concerns that if TIM were allowed to maintain significant control over the new single network, the situation could eliminate the incentive to innovate and lead to a hike in prices for the end-user from lack of competition. The news of the potential merger, alone, was enough to induce a competitor, Tiscali, to cease financing its own high-speed infrastructure.

Rome’s aggressive intervention in trying to eliminate the very competition which it introduced itself just a few years ago in response to stagnating broadband rollout has raised more than a few eyebrows, and industry insiders and consumers alike are waiting to see Draghi’s position on the issue. He seems unlikely, however, to favour the mash-up given his history of overseeing important privatisations. What’s more, it’s doubtful that Draghi will want to kickstart his new relationship with Brussels by getting into a tussle with antitrust authorities over the rollback of competition.

Meanwhile, Draghi will need to take a closer look Conte’s renationalisation of Italy’s flailing airline. Last year as the bottom fell out of the aviation sector amidst the pandemic, Conte’s government pledged to sink at least €3 billion into Alitalia, which it is slowly converting into a public airline dubbed “ITA”—but the flag carrier’s thirst for cash seems endless. The troubled airline just received €73 million from the State at the end of 2020, yet is still struggling to pay salaries and other costs. What’s more, whatever the company’s CEO might claim to the contrary, the rebranded company is unlikely to turn a profit in the near future, given international border closures. Given the tremendous investment the Italian state has made in Alitalia/ITA, Draghi will need a comprehensive turn-around plan, involving industry experts, to ensure that the airline finally takes off.

Funding Italy’s renaissance

Draghi’s other priority will be the careful stewarding of the €209 billion in EU funds set aside for Italy’s recovery, before the fast-approaching April deadline to lay out a comprehensive plan of how to distribute the best funds. With Italy’s 158% GDP debt burden, it is heavily dependent on the ECB; who better, then, to distribute the EU purse than someone with high-level contacts in Europe. But it is not easy to decide on the best beneficiaries, as Alberto Alemanno, professor of EU law at H.E.C. Paris Business School elucidated: “The Gordian knot is how to spend EU funds and whether to ascribe them to new or pre-existing projects. While the former would further increase Italian record high public debt, the latter would reduce the positive impact of the EU financial support”.

It’s not easy, either, to reach a common agreement, as evidenced by Conte’s botched attempt to push through a draft proposal which helped to catalyse Italy’s government crisis at the end of January. Even the literal spending the funds can be a mean feat, if the 2014-20 EU budget period during which Italy absorbed only 43% of EU funds on offer, is anything to go by. On the upside, whereas Conte was a yes man for the populist coalition, at least Draghi will have more independence as a technocrat.

From finding the best uses for EU recovery funds to charting a path forward for the aviation and telecom sectors, the peninsula is waiting with bated breath to see Super Mario’s plans for saving Italy. The former ECB chief is accustomed to working in a high-pressure role, but Draghi will need to hold his own amidst Italy’s political quagmire in order to guide the peninsula out of this crisis and into its recovery.