Mario Draghi’s appointment as prime minister of Italy has consequences that go way beyond his own country. The man who’s credited with saving the euro in 2012 has some very clear ideas about the future of the monetary union. As he returns to Europe’s top table, he has a chance to put them into practice.
The former European Central Bank chief’s return coincides with a moment of great instability in European politics. Angela Merkel, Germany’s chancellor and the dominant political figure on the continent for the past 15 years, steps down in September and no one seems to have the clout to replace her. France’s President Emmanuel Macron has a vision for greater European integration, but he’s had to rely on Germany to implement any of it.
Ursula von der Leyen, the European Commission president, is struggling after delays in procuring Covid-19 vaccines. Christine Lagarde, Draghi’s successor at the ECB, has stewarded an effective monetary response to the pandemic, but she hasn’t yet taken a central role in mapping the euro zone’s future in the same way as her predecessor.
Draghi’s legacy goes further than equipping the ECB with tools for a crisis. In a series of speeches near the end of his term there, he set out the institutional overhaul needed to end the euro area’s unhealthy dependence on its central bank. These include: completing the so-called “ banking union” by setting up a single deposit guarantee scheme for the bloc’s lenders; creating a “capital markets union” to encourage more cross-border ownership of European companies; and establishing some elements of a “fiscal union” to extend help to member states facing economic shocks.
Since the start of the pandemic, the European Union has made some progress toward Draghi’s dream. Last summer, the EU’s leaders agreed to a joint 750 billion-euro ($910 billion) fund to boost investment in the region, opening the way for large-scale borrowing by the Commission.
However, there’s no sign for now that this instrument will outlast the Covid-19 crisis. Moreover, there’s been little progress on other changes, especially for the banking system. As Italy’s new prime minister, Draghi will sit on the European Council with the other EU leaders. Respected as a key figure in Europe’s postwar history, he’ll have a platform to promote his ideas.
European integrationists shouldn’t get too excited, though. Draghi will lead a very heterogeneous domestic coalition, ranging from the far right to the hard left, which might hamper his reformist instincts. His priorities will be, above all, Italian: Speeding up the country’s vaccination program, providing adequate stimulus to the economy and ensuring students make up some of the ground lost during the pandemic. He’ll stay in power for two years at most. The next election is scheduled for 2023. It’s also possible Draghi could become Italy’s next president as soon as next year.
For now, however, he’s well-placed to help confront the two big problems preventing further euro zone integration. The first is the lack of trust from stronger member states like Germany in their weaker partners such as Italy, especially when it comes to making good use of those EU pandemic funds. One of the Draghi government’s first acts will be revamping the existing plan to spend that money. A well-targeted program, accompanied by courageous reforms of the country’s inefficient bureaucracy and other areas, would go a long way toward addressing foreign skepticism about Italy.
The second challenge is overcoming Italians’ wariness about signing up to any stricter EU constraints on banking regulation or the size of budget deficits. As ECB president, Draghi was mindful of the risk of moral hazard — namely that weaker states knew they could always rely on being saved by stronger neighbors. As Italy’s premier he’ll have to explain to his citizens that it’s right to assuage these concerns.
For years Italy has punched below its weight in Europe as it wasn’t able to match the influence of France and Germany. Draghi faces enormous challenges at home — but he also represents opportunity. The EU has much to gain from having Rome back among the grown-ups.
Bloomberg
