By Amy Kazmin, Davide Ghiglione and Silvia Sciorilli Borrelli

In the days before Christmas, Italian prime minister Mario Draghi was peppered with journalists’ questions about the biggest issue looming over Italy’s future. Was Draghi ready to move on from the job he took on 11 months ago and assume the presidency when incumbent Sergio Mattarella’s term ends on February 3?

Traditionally, protocol dictates prospective Italian presidents firmly rebuff any suggestion of interest in a job whose selection process is akin to a papal conclave — no formal candidates, multiple secret ballots and intense backroom negotiations. Yet Draghi gave a response that, for Italy’s political class, was clearly a coded offer of availability. “I don’t have any particular aspirations of one type or another,” the former European Central Bank president said. “I am a man, a grandfather, at the service of the institutions.”

Draghi abruptly presented Italy’s politicians with a dilemma: whether to retain their country’s most celebrated technocrat as prime minister, allowing him to forge ahead with an ambitious EU-funded reform programme, or to elevate him to head of state, potentially triggering a paralysing crisis over a successor to head the government.

MPs, senators and regional representatives began voting yesterday on whether to appoint Draghi or someone else to succeed Mattarella, raising the prospect the government could be weakened or even collapse. The process is expected to take several days, with political parties still engaged in hectic backroom negotiations to try to reach a consensus on a potential candidate.

The uncertainty has renewed anxieties about Italy’s ability to implement difficult but long overdue reforms to improve its growth prospects.

Draghi has galvanised cross-party support for the EU recovery plan, steered a first batch of reforms through parliament and started to cut through Italy’s bureaucratic thicket. Reform momentum and fiscal discipline could falter without his hands-on leadership, putting the entire programme at risk.

It is not just the once in a generation opportunity for an economic reboot that is at stake. The country to a large degree will determine the success of the EU’s €750bn recovery fund, of which Italy is the largest beneficiary — it is due to receive €191bn in grants and loans.

The EU’s experiment, backed for the first time with common EU debt, was devised with Italy very much in mind — a chance to make good on previous EUmandated austerity and perceived lack of solidarity with Rome, which led to the election of the most Eurosceptic parliament in modern times in 2018.

“The success of the European project is — to some extent — at stake,” says Ludovico Sapio, European economist at Barclays. “A political impasse or any scenario that disrupts policy continuity and weakens the reform process has negative implications not only for Italy and the sustainability of Italian debt, but also for Europe as a whole. It could be dangerous for the prospects of further European integration.”

Draghi, 74, was parachuted in from retirement to the prime minister’s office last February amid a deep health, economic and political crisis triggered by the Covid pandemic, which exacerbated already serious longstanding challenges. Italy’s gross domestic product contracted by almost 9 per cent in 2020, as it reeled from the shock of the pandemic.

Since his installation, Draghi has revived flagging business and market confidence with the orchestration of a successful Covid vaccination drive and strict controls, and a generous fiscal stimulus to accelerate the economic recovery. Most significantly, Draghi committed Italy to an ambitious time-line to complete difficult structural reforms to boost its longer-term growth trajectory after decades of stagnation and underperformance.

That no-nonsense leadership and the broad-based political support for the plan to reboot the economy helped assuage longstanding concerns in financial markets and Brussels about the sustainability of Italy’s heavy debts, which now exceed 150 per cent of GDP.

But a messy, divisive presidential election process that triggers a political crisis or derails progress on reforms would seriously worry Brussels — and the financial markets.

“Italy can be seen as a potentially ticking time bomb because of its debt,” says Luigi Scazzieri, a senior fellow at the Centre for European Reform think-tank. “If questions were to re-emerge about the sustainability of that debt, the euro’s foundation would once again be questioned.

Domino effect?

Draghi’s international reputation, record of public service and commitment to Italy’s role in the EU make him an obvious candidate for a seven-year term as a head of state — a role that is not merely ceremonial but carries real powers, especially at times of crisis and deep domestic political divisions.

From the Quirinale — the lavish presidential palace that was once the home of popes and Italian kings — Draghi could use his power to oversee the government and his moral authority to ensure that future administrations keep reforms on track and to check populist policy impulses.

“Only if Draghi becomes president can what we’ve seen over the past year — in terms of getting things done — continue,” says historian and prominent political commentator Paolo Mieli, former editor-in-chief of Italy’s leading daily newspaper Corriere della Sera.

“As president, he can surveil the government to make sure reforms are carried out . . . and after the next general election he can act as the guarantor of Italy’s commitments to Brussels.”

Yet Draghi’s elevation to the presidency carries real risks that his national unity government — which has brought together both right and left parties — could collapse over the question of a successor to run the government and carry reforms forward until the next general elections, scheduled for 2023.

That, in turn, threatens to propel Italy into early elections, undermining Rome’s prospects of meeting the scheduled reform targets on whose fulfilment the continuing flow of EU recovery funds depends. “The real risk of the current situation — and also in relation to the recovery plan — lies in the extremely complex dynamics of events,” says Nathalie Tocci, director of the Italian Institute of International Affairs.

“It is not certain that an alternative equilibrium able to hold the parliament together will be found, even if at the moment this is what everyone wants,” she adds. “The current set-up works well, but removing a pawn could change the whole game.”

In public, EU officials are sanguine about political developments in Rome. Paolo Gentiloni, the commissioner who oversees economic matters who is also a former Italian prime minister, said last month Brussels was watching developments “with confidence and respect”.

However, Italian political turbulence has returned earlier than many in the EU had expected. While the EU’s recovery fund runs until 2026, the Italian plan was designed to front-load reforms and disbursements, in part on the expectation that Draghi would serve as premier until 2023.

Draghi’s government has already begun overhauling Italy’s cumbersome justice system, updated audit and control procedures, started to streamline the public administration and passed the first of several competition reforms.

Rome received a €24.9bn recovery plan funding tranche last August and is now seeking the next €21bn, after claiming to have met an initial 51 reform “milestones”.

Tougher challenges lie ahead, however, with parliament required to pass new laws to implement the nascent changes fully, and wrestle with difficult reforms on tax, public procurement and civil justice. In all, Rome will need to meet more than 100 milestones agreed with the EU to receive the next €40bn.

“The situation is going to become messy,” says Daniele Albertazzi, an expert in Italian politics and rightwing populism at the University of Surrey.

Lorenzo Codogno, a former director-general of the Italian Treasury, says: “It will be hugely tough. The first targets and milestones were effectively procedural legal and preparatory steps. The real meat starts in 2022.”

Brussels is hoping that the momentum built up by the Draghi government — or the threat of EU payments being withheld if targets are missed — will keep Italy on track. Some in EU circles and in Italy’s business community worry more about fiscal discipline, with a new prime minister unable to resist pressure from the parties for spending commitments and tax cuts as the election approaches.

“I don’t think structural reforms have been secured yet,” says Nino Tronchetti Provera, founder and managing partner of private equity firm Ambienta, which focuses on sustainable investments. “The only thing that is certain about [the recovery fund] is that it represents additional public debt on the shoulders of my daughters.”

A stabilising force

The commission has already fired a warning shot, when in November it said Italy had not sufficiently curbed growth in current spending in its 2022 budget, which envisions a fiscal deficit of 5.6 per cent, down from 9.4 per cent in 2021.

Davide Vampa, a professor of politics at the UK’s Aston University, says Draghi is “the unifying figure of this coalition, so removing him creates a lot of problems in the short term”.

“They might find someone to be prime minister after Draghi that has enough prestige and strength to continue the job, but I cannot see anyone,” Vampa says. As prime minister, Draghi created a national unity government, but his move to the presidency might destroy it. “Ironically, a stability figure like Draghi might become an element of instability.”

Even if the technocrat were to remain in the prime ministerial chair, many warn that his effectiveness will almost certainly wane over the next year, as political posturing increases and parties grow more fractious ahead of general elections.

“Either he becomes president or he is gone,” says Mieli. “It’s like when you have a substitute teacher in a classroom and pupils misbehave, knowing the sub is just temporarily filling in. Things are destined to go to pieces . . . Parties would understand they would no longer have to deal with him after 2023, and the loyalty and respect we’ve seen so far would be lost.”

Others believe Italy’s reform drive will almost inevitably lose momentum as general elections draw closer.

“As 2023 approaches, parties will start to look at their constituencies and take distance from policymaking,” says Carlo Capuano, vice-president of global sovereign ratings at DBRS Morningstar.

In Italy’s corporate circles, many are now ardently hoping for Draghi’s elevation to the presidency — to secure his future involvement in public life and reassure financial markets and EU partners about Italy’s longer-term direction — despite the risks of short-term turbulence.

“Our best bet is to keep him around for another seven years, during which he would surely pull the strings of what goes on in government in terms of recovery fund investments and reforms,” says one top business figure.

As president, Draghi would have the power to appoint prime ministers, veto cabinet appointments and send legislation back to parliament for reconsideration — powerful tools that could be used to nudge the reform process forward and keep future populist, Eurosceptic governments from going off the rails.

“This country suffers from the increasingly lower credibility of its politicians,” Provera says. “In this context, the president has a very important role . . . he or she can stabilise the political scenario for years to come.”

For some Italian politicians, however, the prospect of a more interventionist presidency under Draghi is reason to vote against. In backroom negotiations, politicians are struggling to find a resolution. Neither Matteo Salvini, leader of the rightwing League, nor Enrico Letta of the centre-left Democratic party have publicly endorsed Draghi’s candidacy.

“These days there is one meeting after another, nonstop phone calls and messages,” says a lawmaker from the Five Star Movement. “The tension is palpable. The feeling is that the situation has never been so fluid and unpredictable.”

Lack of alternatives

Media tycoon and four-time former prime minister Silvio Berlusconi, who was convicted of tax fraud in October 2012, had proffered himself as a potential president. But Berlusconi, a deeply polarising figure whose election would have undoubtedly destabilised the government, withdrew himself from consideration on Saturday evening, urging supporters to “abstain” from putting his name forward.

Analysts believe some politicians are trying to find a respected alternative individual, who can be propelled into the presidency to maintain the status quo and keep Draghi at the helm of government. “The moment is extremely complex not just because of this election but also because of intense going negotiations on several topics including . . . whether we can find someone to replace Draghi who can be accepted by the whole political spectrum,” says Daniela Sbrollini, a senator and presidential elector from Viva Italia.

Others have advocated the re-election of incumbent Mattarella, with the implicit assumption that he would stand down early, clearing the way for Draghi’s elevation later, though the president is thought to be against a second term on principle.

However many warn that having expressed even cautious interest in the presidency, Draghi would be significantly diminished should the governing coalition he leads now refuse to elevate him to the pinnacle of the Italian state.

“The worst case is that he does not make it and carries on as PM, and his magic fades away, and his God-like aura is gone,” says Francesco Galietti, founder and CEO of Policy Sonar, a Rome-based political risk consultancy. “That is the end of everything.”