Draghi’s Continued Premiership Prolongs Political Stability, but Risks Remain After 2023 Elections

However, uncertainty looms after the 2023 elections – representing one core challenge to the economic outlook.

A continuation of Draghi’s national unity government to at least 2023 – as we have assumed – is expected to further advancement of crucial reform regarding public procurement and competition law, underpinning economic recovery and ensuring a continued inflow of vital funding from the EU’s Recovery and Resilience Facility.

Italy front loaded reforms, upon which receipt of funding from the 2021-26 EU Recovery Fund is conditional, to 2021 and 2022 – Draghi’s assumed window as prime minister. This includes overhaul of public administration, the judiciary, budgeting and pensions.

Draghi’s space for significant reform is finite, given 2023 elections

Nevertheless, Draghi’s space for significant reform is finite, given the support he requires in parliament to govern might weaken as parties step up electoral campaigns before 2023 elections, although he possesses a possible trump card of threatening to pull the plug on government should parliament become gridlocked.

Even so, the credit rating relevance for Italy and the EU more broadly of even a single additional year of Draghi as prime minister ought not be understated. Draghi could leave a lasting mark upon European economic governance by adding his respected voice to EU deliberations around changes of the Stability and Growth Pact and regional budgetary rules.

Still, the re-election of Sergio Mattarella as president in the absence of any other candidate with a majority backing of electors did illustrate how difficult consensus-building remains in Italy, which might foreshadow possible complications in formation of a government after elections of 2023.

Coming elections are one risk due to possibility of a skew to the political right

The forthcoming 2023 election remains, moreover, a risk due to possibility of a skew to the political right after the election – were Italy to elect a (first) far-right prime minister (of the post-war era). This said, especially under an alternative scenario in which the right were to come up short, we also do not rule out possibility of Draghi being called on to prolong a prime ministership under scenario of a hung parliament.

For now, the Draghi administration has been responsible for comparatively stable and prudent policy, boosting domestic economic sentiment, anchoring a recovery that has as well benefitted from pent-up demand and raised public- and private-sector investment.

An official estimate of 2021 economic growth at an above-consensus 6.5%

An official estimate with respect to 2021 economic growth was printed of an above-consensus 6.5% – near Scope’s December estimate for 6.6% for last year. In 2022, Scope expects growth of a robust 4.5%, prior to 2.1% during 2023.

Prudent policy making is especially significant given the recent increase in yields on Italian government bonds to a nevertheless still accommodative 1.4% – equivalent to 134bps spread to Germany – from a low of around 0.5% last August. Minimising unnecessary sovereign risk premia associated with domestic politics is crucial for the state’s long-run debt sustainability, as the ECB pulls back on support in debt capital markets amid a sharp pick-up of inflation.

An upward government debt trajectory over the long haul

We assess Italy’s debt trajectory as remaining on an upward trend over the long run (factoring in rises during future crises).

Enhanced stability of the national government and momentum behind a robust programme of reform supported our announcement of a revision of an Outlook concerning Italy’s BBB+ sovereign credit ratings to Stable, from Negative, in August of 2021.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Giulia Branz, Analyst at Scope Ratings, contributed to writing this commentary.