ROME: Mario Draghi is using his position as Italian prime minister to deliver the one thing he could never conjure up when he was head of the European Central Bank: massive fiscal stimulus.
In his first few months in office he’s already on track to run through over 70 billion euros (S$112 billion) in support for the economy. Combined with stimulus measures passed by the previous government, that adds up to over 170 billion euros to protect the country’s families and businesses from the pandemic. The government says that will push this year’s budget deficit to 11.8 per cent of output, making it the biggest stimulus effort in Europe, report agencies.Mr Draghi is acting from the conviction that Europe’s economies will be stronger in the long run if fiscal and monetary authorities work together to jolt them back to health as soon as possible. While that means running up massive debts in the short run, the alternative might be a cycle of half measures and anaemic expansion that would leave Italy and the European Union lagging further and further behind the US and China.
“Draghi himself has said it’s a wager,” said Veronica De Romanis, professor of European Economics at Rome’s Luiss University. “But it’s the only chance we have, the alternative is austerity.”
That all-in strategy is the most audacious manifestation yet of a sea change in fiscal philosophy in Europe since the austerity-driven response to the sovereign crisis a decade ago. Mr Draghi’s determination to make growth as the lodestar of his policy cements Italy’s place alongside France in brushing off potential constraints on spending and taking advantage of the market’s willingness to underwrite economic recovery.
The extra spending will push Italian debt near to 160 per cent of output this year, higher even than the 159.5 per cent touched after the devastating impact of World War I. The International Monetary Fund forecasts that Italy’s economy will expand by 4.2 per cent this year, faster than the euro-area average. But Mr Draghi’s deficit plans are more aggressive than those of any of his European peers.
“Judged with the eyes of yesterday it would be very worrying. Today’s eyes are very different because the pandemic has made the creation of a great deal of debt legitimate,” Mr Draghi said during a press conference in Rome on Friday. “Debt is good if you can put a company back on the market and allow it to support itself.”
Italy’s 10-year bond yields were at 0.747 per cent last Friday after closing at a record low of 0.456 per cent in February, while investors are still paying the French government to take their money for a decade.With European fiscal rules suspended until 2022, the door is wide open for countries that want to provide large-scale stimulus and Italy is due to get more help when about 200 billion euros in European recovery funds starts to come through later this year.
While disputes within Poland’s governing coalition have threatened to delay the ratification of the plan, European Commission Vice-President Valdis Dombrovskis said last Friday that the EU is in “the final stage” of preparations for releasing the funds, although a handful of countries still have work to do.