Maintaining Draghi as PM prolongs political stability, but risks remain after 2023 elections



However, uncertainty looms after the 2023 elections, posing a major challenge to the economic outlook.

The continuation of Draghi’s government of national unity until at least 2023 – as we have assumed – should help advance crucial reform in public procurement and competition law, support economic recovery and to ensure a continued flow of vital funding from the EU Recovery and Resilience Facility.

Italy has tasked the reforms, on which receipt of funding from the 2021-26 EU Recovery Fund is conditional, until 2021 and 2022 – Draghi’s supposed window as prime minister. This includes overhauling public administration, the judiciary, budgeting and pensions.

Draghi’s space for meaningful reform is limited, given the 2023 elections

Nevertheless, Draghi’s space for meaningful reform is limited, given that the support he needs in parliament to govern could weaken as parties ramp up their campaign trails ahead of the 2023 elections, although he has a possible trump card to threaten to unplug the government if parliament becomes jammed. .

Even so, the credit rating relevance for Italy and the wider EU of just one more year of Draghi as prime minister should not be underestimated. Draghi could leave a lasting mark on European economic governance by adding his respected voice to EU deliberations on changes to the Stability and Growth Pact and regional fiscal rules.

Yet the re-election of Sergio Mattarella as President in the absence of any other candidate with majority voter support has illustrated how difficult the search for a consensus remains in Italy, which could portend possible complications in forming a government after the 2023 elections.

The upcoming elections are a risk due to the possibility of a political right bias

The next elections in 2023 remain, moreover, a risk due to the possibility of a post-election political right-wing bias – should Italy elect a (first) far-right (post- war). That said, especially in an alternate scenario where the right were to show up short, we also do not rule out the possibility that Draghi will be called upon to extend a term as prime minister in the scenario of a suspended parliament.

For now, the Draghi administration has been responsible for a relatively stable and cautious policy, boosting domestic economic sentiment, anchoring a recovery that has also benefited from pent-up demand and increased public and private sector investment.

An official estimate for 2021 economic growth at 6.5% above consensus

An official estimate for 2021 economic growth was printed at an above-consensus level of 6.5% – close to Scope’s December estimate of 6.6% for last year. In 2022, Scope expects robust growth of 4.5%, before 2.1% in 2023.

Prudent policy is particularly important given the recent rise in Italian government bond yields to a still accommodative 1.4% – equivalent to a 134 basis point spread with Germany – from a trough of around 0.5% last August. Minimizing unnecessary sovereign risk premia associated with domestic politics is crucial for the long-term sustainability of government debt, as the ECB withdraws its support for debt capital markets amid a sharp acceleration in economic growth. ‘inflation.

An upward trajectory of long-term public debt

We estimate that the trajectory of Italian debt remains on a long-term upward trend (taking into account increases during future crises).

The increased stability of the national government and the momentum behind a robust reform program supported our announcement of a revision of the outlook for Italy’s BBB+ sovereign credit ratings to Stable, from Negative, in August 2021.

For an overview of all of today’s economic events, check out our economic calendar.

Dennis Shen is Director of Sovereign and Public Sector Ratings at Scope Ratings GmbH. Giulia Branz, analyst at Scope Ratings, contributed to the writing of this commentary.

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