Economy

Former ECB Chief Mario Draghi Accepts Task of Forming a New Italian Government

ALESSANDRO DI MEO | AFP | Getty Images
  • Italy's recent political chaos began when a small party withdrew its support for the fragile coalition government.
  • The country's president is trying to avoid new elections and is looking to have Draghi lead a technocrat government.
  • The possibility that Draghi will become the new Italian prime minister has been well received in financial markets.
  • However, if lawmakers approve his appointment, he will have a difficult task.

LONDON — Famed for rescuing the euro in the grips of a sovereign debt crisis, Mario Draghi is now being asked to help his own country.

The former president of the European Central Bank met Italy's president, Sergio Mattarella, at lunchtime on Wednesday — a meeting where Draghi was asked to form a technocratic government and solve the ongoing political crisis in Rome over the past month.

Italy's recent political chaos began when a small party withdrew its support for the fragile coalition government. This meant that the pro-EU cabinet lost the necessary working majority in the Italian Parliament which raised the prospect of a snap election at a time of a severe health and economic crisis.

Draghi accepted the task given to him by the president at a press conference Wednesday lunchtime, saying he would return after establishing whether he's able to or not. He also noted the grave situation that his country currently faces.

"I will look to Parliament, the expression of the popular will, with great respect," Draghi said, according to a Reuters translation.

'I wish Mario and Italy the best'

Mattarella has tried to solve the impasse by consulting with the different political leaders. However, these negotiations have not yielded any working majority and the country's president is trying to avoid new elections.

Polls show the anti-immigration Lega party would win the most votes in an election, and could potentially form an alliance with the far-right Brothers of Italy party.

"I wish Mario and Italy the best. I think Mario did an outstanding job as head of the ECB, the famous sentence with a few words, he stabilized the euro," Ana Botin, executive chair of Banco Santander, told CNBC's "Squawk Box Europe" on Wednesday, adding "I am sure he will do the same for Italy."

"Say what you like about Mario Draghi, but he's not one to shirk responsibility in a crisis," Nick Andrews, European analyst at Gavekal Research, said in a note on Wednesday.

Draghi served as ECB president for eight years and was at the helm during one of the most acute moments in the history of the euro zone. The sovereign debt crisis shed light on how weak public finances were in certain countries and that sparked concerns that the 19-member region would break-up. 

As tensions escalated, Draghi used a speech in London in 2012 to reassure market players that the ECB would do "whatever it takes" to maintain the stability of the euro zone.

His words calmed investors and effectively saved the euro area at the time. Draghi would then take monetary policy to uncharted territory in the region, introducing negative interest rates and quantitative easing. Both policy instruments are still in place.

Markets rejoice at Draghi's return

The possibility that Draghi will become the new Italian prime minister has been well received in financial markets.

Italian bond yields dropped on Wednesday morning, thus reducing borrowing costs for the Italian government and suggesting that investors were more confident about Italy.

The main Italian index also traded more than 2% higher in early deals on Wednesday and the euro saw some strength on Tuesday evening following media reports of the meeting between Mattarella and Draghi.

Shares of Italian banks were among the top performers in Europe on Wednesday morning, with Intesa Sanpaolo, Banco BPM and UniCredit up around 5%.

Tough task ahead

However, if lawmakers approve Draghi's appointment, he will have a difficult job ahead.

"The parliament remains deeply divided, and the new government will have to rely on a diverse and fractious coalition with nothing in the way of a shared ideology or policy platform. Advancing divisive, politically costly reforms will remain a challenge," Federico Santi, senior analyst at Eurasia Group, said in a note.

Mattarella has made it clear that the priority of the new government will be to steer Italy through the pandemic. The country has been one of the hardest hit by the coronavirus in Europe.

To date, Italy has recorded more than 2.5 million Covid infections and 89,344 deaths, according to data compiled by Johns Hopkins University.

The new cabinet will have to put together a plan on how to invest upcoming European funds and propose how it will reform the economy — the latter is a pre-condition to receiving EU money.

"Past experience shows that technocratic governments in times of national emergency can make rapid progress during the first 6 to 12 months, but their political capital and support in parliament erodes quickly after that," Santi said.

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