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Mario Draghi uses his position as Italian Prime Minister to deliver the one thing he could never think of when he headed the European Central Bank: massive fiscal stimulus.
In his first few months in office, he is already on track to devote more than 70 billion euros ($ 84 billion) to support the economy. Combined with stimulus measures from the previous government, that adds until more than 170 billion euros to protect the country’s families and businesses from the pandemic. The government says this will push the budget deficit up to 11.8% of production this year, the government says, making it the largest stimulus effort in Europe.
Draghi is acting in the belief that long-term European economies will be stronger if the fiscal and monetary authorities work together to restore them to health as soon as possible. That means going into huge debt in the short term, but the alternative could be a cycle of half measures and anemia, which would leave Italy and the European Union further and further behind the US and China.
Exciting
Italy’s GDP will grow faster than many of its neighbors, but Draghi still has the most ambitious stimulus program
Source: International Monetary Fund, World Economic Outlook Database, Italian Ministry of Finance
“Draghi herself has said it is a bet,” said Veronica De Romanis, professor of European economics at Luiss University in Rome. “But it’s the only chance we have, the alternative is cutbacks.”
That all-encompassing strategy is the boldest manifestation yet of a turnaround in tax philosophy in Europe since the austerity-driven response to the sovereign crisis a decade ago. Draghi’s determination to grow as the mainstay of his policy strengthens Italy’s position next to France in removing potential spending constraints and capitalizing on the market’s readiness to support economic recovery.
Read more: France is leading the campaign for tax incentives in Europe
The additional spending will push Italy’s debt close to 160% of production this year, even higher than the 159.5% touched upon the devastating impact of World War I. The International Monetary Fund predicts that the Italian economy will grow by 4.2% this year, faster than the eurozone average. But Draghi’s deficit plans are more aggressive than those of any of his European counterparts.
“Seen with yesterday’s eyes, it would be very worrying. Today’s eyes are very different as the pandemic has made the creation of much of the debt legitimate, ”Draghi said at a news conference in Rome on Friday. “Debt is good if you can put a company back on the market and provide for its own livelihood.”
Italy’s 10-year bond yields were 0.747% Friday, after closing at a low of 0.456% 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 to countries willing to provide large-scale stimulus measures, and Italy should receive more aid when around € 200 billion in European recovery funds comes in later this year.
While Disputes within Poland’s government coalition threatened to delay ratification of the plan, European Commission Vice-President Valdis Dombrovskis said on Friday that the EU is in “the final stages” of preparations to release the funds, although a handful of countries still have work to do. “For a large majority of Member States, the plans are well advanced,” he said at a press conference in Brussels after talks with EU finance ministers.
Draghi made a name for himself when he headed the European Central Bank with a famous pledge to “do whatever it takes” to save the euro, letting the markets know he was prepared to push monetary policy to the limit. push.
The American example
Convinced that the region was facing deflation, Draghi steered the ECB on a stimulus path with multiple unconventional instruments, from negative interest rates to quantitative easing, which were previously considered unreasonable in the context of the eurozone, not least amid German disagreements.
Draghi’s taboo-breaking approach was based on the Federal Reserve in Washington, but left the euro area torn by disagreements by the time he left the ECB in late 2019. He had pushed through his latest round of bond purchases over public opposition from central bankers. from Germany, France and the Netherlands, leaving scars that his successor, Christine Lagarde, still cares for.
While driving the monetary policy engine at the ECB, Draghi at times expressed frustration that governments were no longer doing fiscal policy to support demand.
Now in control of the fiscal levers in the EU’s third-largest economy, he is helping to align the bloc more closely with a push in the advanced world to prioritize extraordinary stimulus measures as the central response of governments to a exceptional economic crisis. In the US, that approach has been revived this year with direct payments to citizens approved since the beginning of President Joe Biden’s administration.
When he presented his plans for another round of borrowing on Friday, a reporter asked him if he hadn’t to feel that was another 40 billion euros too far. The prime minister’s response suggested he had embraced his tax gamble, he’s going all-in.
“I don’t think if you were 30, instead of being 40, you wouldn’t have had the chills,” he said. And then he added, “Growth is the most important criterion: it must be sustainable growth.”
– With the help of Craig Stirling, John Follain, Viktoria Dendrinou and Samuel Dodge