Draghi’s reforms: disenchantment in Italy

Mhe Italians celebrated their national holiday on June 2nd with anxious eyes on a future that has become uncertain. The memory of the overcoming of dark times through the founding of the republic in 1946 could not dispel current concerns. The restrictions of the pandemic have expired. But hopes that the new freedoms will lead to a speedy return to prosperity have faded because of the war in Ukraine and inflation – as elsewhere. The government had to noticeably lower its growth forecast. Italy is as dependent on Russian gas as Germany is and now needs a tour de force to break away from its major supplier.

But that is just another mammoth task in a long list of overdue feats of strength. Italy has promised numerous structural reforms which, together with the billions in allocations from the European reconstruction fund, should ensure a sustainable modernization push. The war diverts the spotlight from reforms, but nothing could be more wrong than to neglect them. Because especially in times of epochal confrontation, national economies must be healthy and competitive. Mario Monti, the former prime minister and EU commissioner, recently accused his namesake Mario Draghi of not going far enough with structural reforms.

In fact, a number of projects are piecemeal, such as pensions, bureaucracy reduction, the judiciary and competition law. It was already clear to many Italians when he took office as head of government that “Super Mario”, celebrated as the savior of the euro, only boils with water. 15 months later disillusionment set in, but not disappointment. His reform work is undoubtedly a step in the right direction, but it can only be a start. The political situation today is different from that under Monti, who pushed through a number of reforms from 2011 to 2013 under the pressure of a sovereign debt crisis. Unfortunately, his successors took many things back soon afterwards, especially the pension reform.

Instead, Draghi hopes for lasting change and is working on the art of the possible, because he cannot govern without the populist parties in his governing coalition from the far right to the far left. The pressure from Brussels is essential because Draghi needs help with arguments in the fight against internal resistance. However, time is running out for him now. The populists are increasingly profiling themselves for the next parliamentary elections. It is questionable whether the reform course will be continued when the Italians go to the polls by May 2023 at the latest. It is not considered likely that Draghi will continue. At most, a renewed stalemate between the parties could extend his mandate. The frontrunners in the polls are currently the right-wing populist Fratelli d’Italia – the only significant opposition party – and the centre-left Partito Democratico. A victory for the right-wing populists could lead to the primacy of an anti-competitive economic policy that believes in the state and refuses any outside interference. In this case, dark times threatened Europe.

Italy’s basic political problem

It is now becoming increasingly clear that two years of reform policy are short. Italy’s fundamental challenges – sluggish growth and a shrinking population – are the same as before the pandemic. This also applies to the north-south divide, the incomplete infrastructure, the growth-inhibiting tax system and the resulting low productivity. International investors’ distrust has not disappeared, as shown by rising interest rates.

The second largest industrial nation in the EU, ahead of France, has considerable potential: many medium-sized companies are dynamic and innovative. The state budget balance minus the cost of old debts was positive for many years. Italy has an export surplus. France, for example, can only dream of such achievements. The basic problem is of a political nature: Italy has repeatedly relied on technocratic governments when politicians have maneuvered themselves into a dead end. However, the non-party transitional rulers only provided pauses for breath. As long as no one can be found who will ensure a sensible economic policy with lasting democratic legitimacy, Italy’s creeping decline will continue. The great opportunity of billions in transfers from Brussels would thus be wasted.