StockBeat: Prospect of Draghi's Return Lifts Italian Stocks

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Investing.com — Italy’s stocks and bonds roared back to life on Wednesday after President Sergio Mattarella confirmed he will invite Mario Draghi, the former president of the European Central Bank, to form a new government.

By mid-morning in Europe, the FTSE MIB was the standout performer in the region, gaining 2.2% to 22,560 points, while the spread between the Italian and German 10-year bond yields tightened by 11 basis points to the narrowest since 2016.  Conspicuously, Italy’s banks were much the best performers in their sector in Europe, with Unicredit (MI:CRDI) stock rising 4.7%, Intesa Sanpaolo SpA (MI:ISP) stock rising 5.7% and Mediobanca (OTC:MDIBY) stock rising 3.2%.

The moves reflect the strength of Draghi’s reputation in financial markets that goes back to the dark days of 2012 when he faced down a terrifying attack on Italy’s bond market that nearly forced it out of Europe’s currency union. It also reflects his success in sustaining asset prices with ever more radical measures to loosen monetary policy, but overlooks his failure over eight years to arrest a long-term downward trend in inflation.

Mattarella is due to meet Draghi at 12 PM local time in Rome (5 AM ET, 1100 GMT), with a view to installing him as the head of a government of national unity. That follows the collapse last month of the previous coalition of center-left parties with the 5 Stars Movement.

If he accepts, Draghi will face a difficult task: the structural reforms he called for at every ECB press conference for eight years were constantly resisted by Italy’s main parties, who knew they would be unelectable if they enacted them. As a result, Italy still has the worst growth record of all the major European economies and, despite some improvements under Matteo Renzi and Giuseppe Conte, one of its highest jobless rates too.

The big question is whether Draghi, 73, will want to repeat the experience of Mario Monti, the technocratic prime minister who hauled Italy out of its last crisis (with Draghi’s help) in 2012/13. Monti’s reward for his efforts was to be demonized as a lackey of the European establishment putting Brussels’ and Berlin’s interests ahead of his country’s.

That line of polemic helped shape Italy’s current political landscape, with both 5 Stars and the right-wing Lega party of Matteo Salvini drawing much of their energy from the populist urges nurtured by Monti’s austerity. Both parties are only likely to support a Draghi government to the extent that they believe they can dodge the anger his reforms are likely to provoke. Both will find it easy to stoke suspicions that he intends to deliver Italy into the hands of the Commission’s bailout police.

Draghi has two big advantages over Monti. First, Italy is set to receive over 200 billion euros from the EU’s Recovery Fund, a measure of direct fiscal support that Monti never enjoyed; second, Draghi has more capital with the ECB than any other Italian and can be assured of its unequivocal support in any likely scenario.  Thirdly, Draghi’s achievements in 2012, averting Italy’s financial ruin, would ensure his premiership starts with more domestic political capital than Monti’s.

However, the challenge he faces is essentially the same one, of reconciling a stagnant, ageing country to the need of radical reform. Even Super Mario will struggle to meet that.