Draghi’s march to the head of state of Italy could cost 4 points to the GDP of the Eurozone

The prospect of Mario Draghi becoming president – head of state – of Italy and ceasing to be prime minister is one of the main risks facing the country’s economy, and that march would also affect the Euro Zone in general. . A Bloomberg Economics study has modeled the possible consequences on the European economy, assuming that political instability causes a 300 basis point rise in the risk premium and uncertainty increases two standard deviations.

With a limited mandate and fear of being isolated from the rest of the world, which is tightening its monetary policies, the European Central Bank could postpone the bond purchases necessary to stop the Italian bloodletting, in a negative reflection of the “Whatever it takes” by Draghi. The sharp tightening of financial conditions could cut GDP by more than 4% by the end of 2022. Even so, activity would recover faster than after the debt crisis of 2011, as the ECB remains ready to act and the EU has agreed to avoid austerity. In any case, the blow would not be pleasant for the financial markets.

Draghi, who leads a technocratic government with the support of almost the entire parliamentary arch but without much enthusiasm, has hinted that he could agree to become president of the country next month if the parliament elects him.

“As Prime Minister, Draghi gives the image at home, in Europe and before global investors of being a guarantor of stability. His presence will help achieve some progress in the structural reforms that Italy needs to reactivate growth,” said Guidogiorgio Bodrato , Berenberg economist. His possible departure “introduces a significant degree of political risk in Italy.”

The prime minister said that “the conditions for stability exist” regardless of who leads a future government, as long as it has the support of the same large majority that exists now, and that early elections are avoided before the end of the government. the legislature in 2023. Polls show a practically four-fold tie between two hard-right parties – Matteo Salvini’s League and Giorgia Meloni’s Brothers of Italy – the center-left of the Democratic Party and the centrist populism of the Five Star Movement. The possible tiebreaker could remain in the hands of two former prime ministers: Silvio Berlusconi’s center-right Forza Italia; and a series of small left-wing parties, most notably Italia Viva, by Matteo Renzi.

A fundamental ‘conclave’

Draghi, former president of the European Central Bank, is considered one of the main candidates for the presidency, who will be voted secretly in Parliament next month. The election, which can last days and resembles papal conclaves in its opaque and complex procedures, often requires several rounds of voting before reaching consensus. There are no official candidates, but it depends entirely on what the deputies and senators decide.

Uncertainty about Draghi’s future is also destabilizing the ruling coalition, which includes the League, the Five Star Movement and the Democratic Party.

If elected, Draghi would still have power as president, albeit of a different kind. Although the office is primarily ceremonial as head of state, Italian presidents elect prime ministers. And the complex and chaotic Italian political system has forced numerous presidents to nominate technical candidates who have not left the polls or lead any of the main parties, such as Draghi himself.

As president, Draghi would also have the final say in the dissolution of parliament, making him a stabilizing force in the crazy Italian political arena. Italian presidents can also reject laws and decrees on constitutional grounds.