Draghi’s Challenging To-Do List in Italy—and the EU

Italy fell into a political crisis in late-January, when, following disagreements in the coalition then headed by Prime Minister Giuseppe Conte, a small but crucial part of the government withdrew its support. Without the backing of former Prime Minister Matteo Renzi’s Italia Viva party, Conte no longer had the required majority in Parliament. Given the dire straits of Italy’s health system and economy due to the coronavirus pandemic, the unexpected move raised concerns over the country’s ability to effectively continue its vaccination campaign and lay the foundations for economic recovery.

Those fears were alleviated on Feb. 18, when Mario Draghi, the former governor of the European Central Bank, was officially confirmed as Italy’s new prime minister. After several days of consultations with the various political parties in Parliament, Draghi formed a Cabinet comprising ministers from across the political spectrum as well as some nonpolitical “technical” appointees. Together, they take on the very difficult task of overcoming the economic fallout from COVID-19 as well as tackling Italy’s pre-existing structural problems.

In his new role, Draghi will need the support of Parliament to pursue substantial reforms aimed at increasing Italy’s productivity, while also submitting an investment plan for approval by the European Commission to access financial support from the European Resilience and Recovery Facility. The facility, known as the ERRF, is responsible for disbursing funds raised by the European Union’s historic collective debt deal reached last year to finance member states’ recoveries from the economic impact of the pandemic.

Draghi’s structural reforms are ambitious, as they include politically sensitive topics, such as judicial and fiscal reforms, and entail coordination across ministries that will require political harmony. As for the investments that will be funded through the ERRF, most have a time-horizon that extends beyond 2023, when the current legislative term will come to an end. Therefore, Draghi’s main challenge will be to ensure that a future government does not undermine his current efforts.

Draghi’s international recognition will be an asset in the negotiations over ERRF funding with the European Commission, as well as in enhancing Italy’s position as president of the G-20 and co-president of the COP26 United Nations climate change conference, both for the duration of 2021. He is also likely to use his new perch to push for further financial integration in the EU, as he advocated while at the European Central Bank. Yet, the time Draghi has for pursuing such goals is limited and so is the political bandwidth, so it would be wise to manage expectations.

Economic Challenges

First and foremost, Draghi will have to deal with the ongoing health and economic crises stemming from the pandemic. He plans to accelerate the pace of vaccinations in Italy by using sites like stadiums, airports and private clinics, in addition to hospitals, to administer doses. But the biggest battle will be fought on the EU level, where the centralized procurement of vaccine doses has recently slowed due to pharmaceutical companies’ unexpected shortfalls in production.

Second, Draghi must present a draft plan to the European Commission to negotiate access to funds from the ERRF. Italy has been allotted around 209 billion euros, of which 127 billion will be in the form of loans and 82 billion in grants. At the same time, he must provide guarantees of Italy’s ability to repay its debt through increased productivity. To do so, he needs to work across the political spectrum to pursue structural reforms, two of which are particularly pressing and politically sensitive: streamlining public administration and reforming the tax code. The average length of a civil trial in Italy is eight years, compared to the European average of two years. The level of tax imposition in Italy is among the highest in Europe. Both factors constitute a significant deterrent for investors.

The time Draghi has for pursuing his ambitious goals is limited and so is the political bandwidth, so it would be wise to manage expectations.

Because Draghi’s program is wide but also targeted, there is a good chance he’ll be able to accomplish at least some of it. But as with structural reforms everywhere, some discontent and resistance is inevitable, in terms of both public opinion and political opposition, even as the long-term impact on social inequalities remains uncertain. Draghi’s previously expressed positions on “creative destruction”—by which the state would offer aid only to efficient businesses, while allowing inefficient ones to go under and offering a safety net for workers—will surely be exploited by political opponents.

Political Challenges

In the choice of his Cabinet ministers, Draghi was forced to reach political compromises with almost all the parties represented in the Italian Parliament: from the anti-establishment Five Star Movement, to the center-left Democratic Party and Renzi’s Italia Viva, to the center-right Forza Italia and Matteo Salvini’s nationalist League party. Interestingly, seven out of the 23 ministers are holdovers from the Conte government, and only eight have a “technical” profile, meaning they do not have any political affiliation. Among the latter are Vittorio Colao, the head of the telecommunications company Vodafone, who will oversee Italy’s digital transition; Daniele Franco, a former director-general of the Bank of Italy, who became the economy minister; Marta Cartabia a former judge of the Italian Constitutional Court who is heading the ministry of justice; and the physicist Roberto Cingolani, who will be the head of a newly created ministry for ecological transition.

Such a broad coalition has caused some turmoil within most of the political “families.” The right saw a split between Forza Italia and the League, both of which decided to support Draghi, and the Brothers of Italy—a far-right party that saw its approval ratings double during the pandemic—which was unwilling to enter a coalition that included its traditional opponents. The Five Star Movement, whose opposition to technocracy and large coalitions is part of its genetic makeup, saw 21 of its lawmakers defect by refusing to support Draghi’s government.

Balancing such a diverse coalition as well as deep-rooted personal animosities among its members—particularly toward Renzi, who has become an extremely divisive figure—will make Draghi’s job especially difficult. He will need to ensure coordination across ministries to amplify the impact of the promised investments across several sectors. Most importantly, as the investment plan will allocate EU funding over several years, Draghi needs to formulate a road map so that future governments will spend this money wisely.

Given the fragmented nature of the Italian political landscape and the reduced number of parliamentary seats that will be contested in the next elections due to institutional reforms passed last year, it may not be in any party’s interest to rock the boat for now. But the history of Italian politics offers ample proof that stability can never be taken for granted.

International Challenges

In his first address to the Senate as prime minister, Draghi reaffirmed Italy’s commitment to its EU and NATO obligations. To his and Italy’s advantage, he enjoys incredibly positive name recognition in both Europe and the United States. Indeed, financial markets reacted euphorically to the announcement of Draghi’s premiership.

Nevertheless, Draghi’s foreign policy agenda will probably be as challenging as his domestic one. Given upcoming leadership elections in Germany later this year and France in 2022, Draghi will likely play an important role in the EU as an advocate for more fiscal integration, which could potentially lead to the ERRF becoming a permanent fiscal investment vehicle. A revision of the EU’s stringent budgetary deficit and sovereign debt limits is also possible.

In addition to the opportunity it offers for expanding Italy’s leverage in the EU, Draghi’s premiership coincides with the broad renewal of trans-Atlantic relations initiated by U.S. President Joe Biden. Italy’s G-20 presidency and COP26 co-presidency with the U.K. also offer high-profile platforms for an agenda that Rome has centered on the “three Ps” of “people, planet and prosperity.” In this regard, Italy’s multilateral efforts could also support the U.S. and the EU as they seek to balance competition with cooperation vis-à-vis China and Russia.

Draghi will certainly be at ease in such formats. However, Italian politics is only ever built on a fragile equilibrium, based on an electoral law that obliges parties to form large coalitions. While the EU and the broader international community appreciate Draghi’s record and experience, they are also aware of the political confines within which he operates.

Giovanna De Maio is a nonresident fellow in the Center on the United States and Europe at the Brookings Institution and a visiting fellow with George Washington University’s Institute for European, Russian, and Eurasian Studies. Follow her on Twitter @giovDM.