Italy’s long drawn-out presidential elections came to an end in January 2022, as the incumbent President Sergio Mattarella was convinced to continue for a second term. The 80-year-old Mattarella had been reluctant to continue. Former ECB Chief Mario Draghi will continue to serve as the Prime Minister of Italy, until the end of his term in 2023.
Mattarella’s re-election to the Presidency is great news for investors, as well as Italy. This means Draghi will remain at the helm of the nation’s economic recovery path, a task he has handled in the past year with aplomb. He was instrumental in drafting the economic recovery plan for Italy and managed to procure funds from the EU Commission worth €68.9 billion in grants and €122.6 billion in loans under the Recovery and Resilience Facility (RRF).
Moreover, he managed to gain cross-party approval for the same, making him one of the few people who enjoys broad support in Italy’s fractious political system. The Italian economy grew 6.5% in 2021, the strongest in 4 decades, rebounding significantly from the 8.9% contraction in 2020.
Mr. Draghi has a crucial role to play in the months ahead, steering the country out of the pandemic crisis and huge sovereign debt. With his stellar credentials and experience, many Italians preferred him as PM rather than a largely ceremonial president over the next 7 years. But, Mr. Draghi’s reign is of limited duration, and he’s set his sights on becoming President.
The “Draghi Effect” and Its Impact on Corporate Dividends
Political instability and economic decline have gripped Italy for decades, before Mr. Draghi stepped in in 2021, after the collapse of Italy’s centre-left coalition government. The country’s debt is among the highest in the world, which increased to 156% of GDP in 2021, from 134% in 2020.
He had been touted as a front-runner for Italy’s next President, a role he might have assumed this year, if he had enough votes. Instead, he led a technocrat government on the insistence of President Mattarella, a move well received by the financial markets in 2021. The main Italian index, FTSE MIB, traded higher by 2%, following news of his appointment, while the euro appreciated. Stocks of Italian banks became one of the top performers in Europe, and Italian bond yields dropped to the lowest level during the year, suggesting investor confidence in the economy.
Mr. Draghi had served as ECB president for 8 years, leading the EU through one of the most critical phases in the history of the continent. The sovereign debt crisis sparked concerns that the EU would break up. Mr. Draghi reassured market players in 2012 that he would do “whatever it takes” to maintain euro price stability and keep the EU zone intact.
As President, Mr. Draghi would have no role to play in economic policies. Italian presidents have a largely symbolic role, but can exercise powers during emergencies like government breakdowns, nominating a new prime minister, or dissolving parliament and calling for elections.
The fact that Mario Draghi remains the PM will bolster investor confidence, which could push companies to pay higher dividends in 2022. Italian aerospace and defence group Leonardo slashed its dividend in 2021. Such companies would likely resume paying dividends in an environment with reduced political uncertainty.
Mr. Draghi has so far not been anti-business. In his October 2021 speech at the B20 summit, he stressed the impact of climate change on a drop in productivity levels for companies. He said more large-scale private funding and public investment would be needed to transition towards a low-carbon economy. He emphasised the importance of the public sector in creating favourable conditions to unlock private investment.
However, he has time and again asked energy firms for their contribution towards economic recovery and curbing of inflation for households and companies. He has also called upon them to promote equality, labour rights and tackle protectionism on vaccines.
Another reason for this has been the mixed reactions of the Five Star Movement, related to his premiership. Italy’s last tryst with a technocratic government doesn’t evoke fond memories. Despite that, Five Star MPs have had a neutral stance on the Draghi administration. This has kept the economy from being swayed by a more anti-corporate philosophy. Mr. Draghi will likely continue on a similar political and economic path, which could be positive for the corporate sector.
The next Italian parliamentary elections are scheduled for 2023, if no snap elections are held in the meantime. The fate of the Italian economy now depends on Mr. Draghi’s ability to secure economic stability in the medium to longer term.
The Challenges Ahead for the Italian Economy
Mario Draghi’s international recognition has so far been the reason for the country being able to tap into EU funds, despite its rising debt. Now, the country will have to implement the promised economic reforms in the utilisation of these funds. Mr. Draghi had told the EU that his plans for the funds under RRF included modernisation of the economy through investments in physical and digital infrastructure, ESG, education, and other long-term needs.
In a world of rising inflation, uncertainty around interest rates hikes and scrapping of ultra-loose monetary policies, we have witnessed selloffs in the global stock markets. This has already increased the cost for investors to hedge against junk-rated EU-based companies that are defaulting on their debt. When interest rates are hiked by the US Fed, heavily indebted countries like Italy will find it difficult to raise money from the market to aid recovery.
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Mario Draghi’s role as Prime Minister is a short-term, albeit crucial, one. Will he continue for longer, given his own ambitions to ascend to President? Time will tell. We know that the current President and Mr. Draghi have a stable relationship, and they will ensure a friction-less resumption of the country’s fight against Covid-19 and the implementation of an economic recovery plan. But the whole Presidential election saga has bared a highly divided political spectrum in the country, and the risks of infighting have already surged.
Soundbites from major parties in Italy in the coming months will impact investor confidence in the economy. To what extent will investors be willing to purchase riskier fixed-income debt, when the ECB withdraws its monetary support? Also, what will Italy’s geo-political stance be under Mattarella and Draghi, in this volatile landscape consisting of Russia, the US and China? That will define the EU’s position and global markets too.
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With thanks to Matthew Riding & Miranda Bass