Italian politics is about to get as messy as the UK version (okay, okay, maybe not so crazy). This weekend, Mario Draghi’s government is teetering on the brink of collapse. The former president of the European Central Bank has already resigned.
Until now that was refused by the Italian president. But without a majority in parliament for his plans to fight inflation, and amid demands to take on more debt to subsidize struggling households, it’s hard to see how he can last much longer. At best, he will run until next year’s election, but only like a lame duck, stripped of any real power.
Admittedly, Italian politics is often chaotic. But step back and look at the bigger picture, and it was clear that the Draghi project was meant to transform the country’s economy and ultimately secure its place in the single currency. After Draghi came to power in February last year, the European Union finally summoned the political will to provide the country with the help it needed to get out of the low-growing, high-debt trap it has been trapped in for 20 years.
Italy received by far the largest share of the huge Coronavirus Recovery Fund, which was largely funded by the EU’s first publicly issued debt. It received 220 billion euros, even though it is only the third largest country in the zone, and was not hit much harder by the virus than anyone else.
The goal was clear. Draghi would use the money to rebuild the Italian economy, and create the higher growth that would make its debt manageable. It “is the largest recovery package in the history of the EU and Italy will receive the largest share,” tweeted EU President Ursula von der Leyen as the deal was signed. “We are putting the strength of our Union at the service of Italy’s recovery.”
It wasn’t a crazy idea at all. At the turn of the century, Italy entered into a monetary union with Germany and France at an uncompetitive exchange rate and with debts exceeding 100 percent of GDP. It was trapped in permanent austerity, destroying the possibility of reform and condemned to slow growth that only increased the debt burden. It was the most vicious circle of all the vicious circles. With some money to play with, Draghi set out to streamline a bloated public sector, invest in technology and remove the barriers to business. The result? Italy would have permanently higher growth, causing a steady decline in debt as a percentage of GDP.
And yet the results are dismal at the moment. Inflation has skyrocketed, as it has across the continent. Growth has stalled and a recession now seems inevitable as the entire global economy slows. Worse, Italy is the only country after Germany that relies most on Russian gas to keep the lights on (it supplied 40 percent of its energy before the war in Ukraine began).