Opinion

Italy Has a Draghi-Sized Problem

No one else has his authority and stature.

Mario Draghi
European Central Bank president Mario Draghi walks to a news conference in Frankfurt, October 25, 2018 (ECB/Martin Lamberts)

Mario Draghi is the best thing to have happened to Italy in many years — and a symptom of its political weakness.

The former European Central Bank chief, who became prime minister a year ago, has the stature to implement difficult but long-overdue reforms in everything from digitalization to labor law. He has the support of all political parties except the far right. They can hide behind Draghi, and Draghi’s authority, when the reforms inevitably hurt vested interests.

If Draghi steps down, the whole thing could collapse. Left, right and anti-establishment parties could once again fall out. A next government could cancel or reverse reforms that affect its voters, which in turn would undermine support for countervailing reforms.

But if Draghi stays as prime minister until the election in 2023, parties need to find someone else to fill Italy’s largely ceremonial presidency, which has a seven-year mandate.

The eighty year-old Sergio Mattarella is due to step down in February. His successor must be chosen by a conclave of 321 senators, 630 deputies and 58 regional delegates.

You would think with so many politicians (Italy has the third-largest parliament in the world after China and the UK), it shouldn’t be too hard to find a replacement. But all eyes are on Draghi again.

Draghi’s agenda

Draghi’s agenda is the most ambitious Italy has seen in a generation.

I wrote about his plans in February and April of last year. Here are the highlights:

  • €57 billion to finance the green energy transition, including investments in hydrogen and nuclear, and making homes more energy-efficient.

The money comes from Italy’s share of the €750 billion EU coronavirus recovery fund.

  • Digitalizing government services and rolling out broadband internet countrywide.
  • Expanding north-south high-speed rail connections.

Italy has the second highest industrial production in the EU, but it is concentrated in the north. The region south of Rome has a third of the population, but produces only a quarter of Italy’s GDP. High-speed trains stop at Naples. Reliable internet and faster trains could help mend Italy’s north-south divide.

  • Closing salary gaps between men and women.
  • Subsidizing women-led startups.

Half of Italian women are in work, the lowest female labor force participation rate in the EU. Italian men are twice as likely as women to start a business.

  • Improving training and career prospects for Italy’s younger generation.
  • Investing €30 billion in education.

I argued in 2019 that Italy was failing its next generation. 27 percent of Italians in their thirties have a higher degree, the second-lowest rate in the eurozone, where the average is 40 percent. 45 percent of Italians under the age of 30 were in (formal) work before the pandemic, compared to a eurozone average of 63 percent. Average real incomes have barely grown in two decades compared to 25-percent growth in France, Germany and Spain. Strict labor laws makes it almost impossible to fire full-time employees while contractors and freelancers don’t receive social benefits, like unemployment insurance. It’s no wonder so many ambitious, well-educated and young Italians prefer to live and work elsewhere in the EU. Italy must urgently upskill its youth and provide them with good jobs.

  • Hiring extra legal staff to resolve long-running trials.
  • Simplifying procedures, including for permits and procurement.

Italy’s courts are the slowest in Europe, which is a major impediment to business growth and foreign investment.

Revealing

The problems aren’t new. The solutions are known. The European Commission has for years urged Italy to invest in digital, improve north-south connections, liberalize labor laws and speed up its courts. For years, Italian prime minister ignored those admonitions.

(To be fair, the last government did put a decent energy strategy in place. All Draghi had to do was put more money into it.)

One of Draghi’s predecessors, Matteo Renzi, made a serious attempt at labor reform, and its fate is revealing.

The social democrat painstakingly negotiated liberalizations with factions of his own Democratic Party and its allies in the trade unions.

In a concession to the unions, rules that made it easier to fire and hire workers were not applied to existing contracts. In a concession to businesses, the maximum length of temporary work contracts was extended and tax credits were provided to hire workers under an open-ended contract.

Still opponents of change did not relent. Three years later, they convinced the next government to overturn the reforms.

Veto points

To use an American phrase, the Italian political system has too many “veto points”.

  • The Chamber of Deputies and Senate are elected under different rules but have equal lawmaking powers.
  • The president appoints prime ministers and can dissolve parliament.
  • Regions have a fair share of autonomy and many are consistently controlled by the same party or coalition of parties, creating powerful baronies that can make demands of national politicians. The right-wing League in particular is beholden to its northern governors.
  • The left, on the other hand, has a strong trade union influence.
  • The civil service can be obstinate. Officials sometimes take years to implement reforms, hoping they will be overturned in the meantime.
  • There are always the courts as a last resort, which we’ve seen are slow and understaffed.

In the past, corruption, nepotism and patronage may have greased the wheels of the Italian system. That still exists, particularly at a local level and in the south, but public tolerance of it is lower. Now it takes an extraordinary personality to knock heads together and get things done.

Thankfully that “strong man” is Draghi, who by all accounts is an honest man with few personal ambitions.

But the same dynamic also produced Silvio Berlusconi, a man of vast dishonesty and even vaster ambitions.

What’s next?

My hope is that Draghi will serve out his term, get the reforms to a point of no return, which should improve Italy’s long-term prospects, which could restore Italians’ faith in their political system, reduce support for do-nothing populists and attract a better class of politicians.

My fear is that Draghi will be compelled to move into the Quirinal Palace, one of the ruling parties’ leaders takes over as prime minister (maybe Enrico Letta, the Democrat who previously served as prime minister from 2013 to 2014), one or more of the other parties (in that case the League, which is losing support to the even farther right) will leave the coalition, eroding the consensus for reform.

Draghi has put too many plans in motion for all of them to be overturned. (Some required buy-in from the EU.) Italy will come out marginally better anyway. But if he is forced into semi-retirement now, the country would lose a once-in-a-generation opportunity to put its house in order.

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