Three reasons why Mattarella’s reappointment as Italy’s president is a huge relief for the west

February 2, 2022

By Niccolò Pisani, International Institute for Management Development (IMD)

– After a tumultuous week of secret votes and intense negotiations between political parties, Italy has reconfirmed Sergio Mattarella as head of state for a second seven-year term. The decision implies that Mario Draghi, the Italian prime minister for nearly a year who was seen as a contender to replace Mattarella, will continue in his current role until the natural end of his administration in 2023.

Parties didn’t initially agree on the re-election of Mattarella, whose role is broadly ceremonial but includes important powers such as the ability to choose the prime minister. It was, in fact, only after eight ballots that consensus was reached on his name, more out of the political stalemate that emerged and the related lack of feasible alternatives than out of a clear-cut political strategy by the leading parties.

Notwithstanding the disenchanting process that Italians had to witness, Mattarella’s re-election is one of the best possible outcomes from this presidential election, especially when looking at what is expected to come next beyond Italian borders. Mattarella’s renewed presidency is in fact great news not only for Italy, but also for the EU and the US. Here are three reasons why.

1. Getting the EU recovery plan right

Over the last year, former European Central Bank President Draghi has had a key role in defining Italy’s recovery plan to revive its coronavirus-battered economy. This uses some national money along with more than €220 billion (£183 billion) of EU money, and Draghi also had to reach a crucial agreement with the European Commission to start releasing the funds.

The success of the EU recovery plan is critical for the future of the entire bloc, and Italy has a key role as the largest recipient of funding. Failing to spend this money well would have dramatic consequences on the nation’s competitiveness and, in turn, that of the EU as a whole. The Mattarella-Draghi duo continuing until 2023 is the best reassurance their EU counterparts could have that Italy’s recovery plan will continue to move forward as hoped.

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2. Stabilising financial markets

Italy was in desperate need of both an internationally respected head of state and a stable government for the upcoming months to avoid sending dangerous signals to markets that are already very unstable. In a world of rising inflationary pressures and uncertainty about how aggressively central bankers will raise interest rates and scrap quantitative easing programmes that create money to prop up economies, we have recently been seeing sell-offs in global stock markets and other financial assets.

This has already prompted a steep rise in what it costs investors to hedge against junk-rated European companies defaulting on their debt. It also raises questions about the borrowing costs of heavily indebted eurozone countries such as Italy.

Italy’s public finances, importantly, depend on the country’s ability to borrow money at attractive rates. On Draghi’s appointment as prime minister, the closely watched gap (or spread) between the rates at which Germany and Italy can borrow via ten-year government bonds shrank to around 0.9 percentage points, the lowest in over a decade. The spread is now around 1.3 percentage points and it is fundamental that it does not increase further, meaning investors must continue to look with confidence at Italy’s plans to revive its economy post-pandemic.

Italian v German borrowing costs 2012-22

Comparison of Italian and German 10-year bond yields — Orange = Italian ten-year bond yield; blue = German ten-year bond yield.
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To this end, Mattarella is a critical pro-Europe stabilising force for Italy, ensuring that Draghi will remain prime minister until 2023. Beyond that and looking at the Italian political elections to take place in 2023, we should not forget that, not only does the head of state have the authority to choose the prime minister, he can approve (or reject) the appointment of all the other government ministers, and even dissolve the parliament. Quite a critical role in the tumultuous period that is likely ahead of us in the international markets.

3. Russia and China

With the French presidential election coming up in April and Germany’s recent choice of Olaf Scholz as chancellor, Italy’s leadership will play a key role in defining the EU position’s in a treacherous geopolitical landscape – not least, relations with Russia and China.

On the Russian front, the US and other Nato allies are increasingly concerned that hostilities between Russia and Ukraine are more likely than a negotiated solution to the crisis. Faced with this potential disaster on its eastern flank, the EU desperately needs strong leadership in the coming few months. With Draghi leading Italy, backed by Mattarella who, as head of state, technically acts also as commander in chief, they will be closely involved in deciding the EU’s stance should a conflict materialise.

As for China, there is a widespread growing worry that a war in Ukraine would make an already assertive Beijing even stronger than before. If the US and Europe move forward to impose tough sanctions on Moscow, the Russian dependence on China will grow even further.

A parallel danger is that the US could end up isolated if the largest EU economies were to obstruct President Biden’s actions by continuing to be more conciliatory towards Russia. An Italian government led by Draghi and under Mattarella’s presidency can be seen as a high-profile, internationally respected and trustworthy Nato ally. Something the US really needs these days.

About the Author:

Niccolò Pisani, Professor of Strategy and International Business, International Institute for Management Development (IMD)

This article is republished from The Conversation under a Creative Commons license. Read the original article.