Morning Brief – From President to Prime Minister

From President to Prime Minister

After passing on the ECB’s Presidency following eight full years in office, Mario Draghi was set to retire. However, yesterday Super Mario accepted the mandate offered by Italy’s Prime Minister Sergio Mattarella to form a new technocratic government. This follows the resignation of Giuseppe Conte in response to the increasingly unstable coalition government he had led for some 16 months. Attempts to reconstruct a coalition had not gone as expected and consultations with party leaders were unable to yield progress towards the reformation of a government. The President concluded that in the middle of a health and economic crisis brought forth by the escalating Coronavirus pandemic, the delay, uncertainty and logistical nightmare of a general election was unfeasible. Time to call in Super Mario…

We’ve now gone full circle in the Eurozone: a politician became a central banker in the form of Christine Lagarde and now a central banker could become a politician if Dr Draghi fulfils his mandate. Reverse engineering might tell us that the transitions between politician and central banker is far from smooth. Lagarde’s early days in office were fraught with mistakes notably including her observation that Italian borrowing costs over the Eurozone norm were not her problem. Due to the technocratic nature of central bank governance and the political nature of forming a government many commentators would have thought that never the twain shall meet. Those sceptics could be proved wrong for a second time as the former central banker embarks upon his quest to form a government. If he is successful, a technocratic government could have big implications for the Euro.

The news of Mario Draghi’s acceptance to form a technocratic government to steer Italy through the vaccination phase of the pandemic and economic recovery was welcomed yesterday by markets. Italian bond yields fell closer in line with Eurozone peers leading to reduced borrowing costs for the Italian government, reflecting greater certainty and less risk surrounding the Italian polity. The FTSE MIB, Italy’s stock market benchmark, rose 2% in morning trade in Milan and the Euro saw a brief spike. Support behind the Euro from yesterday’s announcement was short lived with the single European currency still ending up down on the day versus the Dollar. Unsurprisingly, shares in Italian banks were the biggest winners, up around 5%.

Draghi has one ace up his sleeve, that it is a technocratic not democratic or people’s government that he is mandated with forming. However, he will not be able to save Italy from a health and economic crisis such as this with his one liners. Promising to do whatever it takes to save Italy from the grips of the pandemic or the economic downturn will do nothing to discourage the virus or incite economic confidence. Indeed, the tool kit too at his disposal will be very different. Towards the end of his time at the ECB he, like his successor, called for governments to spend more to fuel price increases and complement monetary policy. If successful in his immediate task of forming a government, this could put more pressure on Italy’s ballooning debt. For now, if a government is successfully in place it will limit political risk in Italy, curb BTP spreads and likely support the Euro. This morning, however, with EURUSD threatening to lose the 1.20 handle, it might not come fast enough.

Discussion and Analysis by Charles Porter

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