Draghi is not expected to transform the eurozone’s architecture over the next few years – CE

Mario Draghi’s reputation and large majority put him in a strong position to promote eurozone reform and he may have some successes in areas such as banking union and fiscal rules. But he will be constrained by his short period in office and the greater financial and political weights of Germany and France, per Capital Economics.

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Key quotes

“We do not expect the EU to move quickly towards setting up a permanent eurozone budget. More fiscally conservative governments will point out that the Next Generation EU, which was much larger than many had expected, has still not disbursed any money. It would be very surprising if Mr. Draghi’s powers of persuasion were potent enough to encourage the core countries (other than France) to back even more fiscal risk-sharing in the near future.”

“It is perhaps more likely that Draghi has a big influence on the reform of the EU’s fiscal rules. Draghi’s government may win some support for creative proposals for a successor to the 60% and 3% debt and deficit limits.”

“Mr. Draghi might also have more luck with making the case for further progress on banking union, given the strengthening of banks in the periphery over recent years. Since non-performing loans have fallen a long way from their peaks in Italy and Spain, and banks’ capital ratios have risen, progress on deposit insurance may now be possible.”

“The big picture is that Mr. Draghi’s influence on eurozone integration is likely to be fairly modest. Germany and France are still the region’s economic powerhouses and will remain more influential than Italy. Also, the EU has tended to make the most progress towards integration during crises, and the most intense period of the pandemic is now (hopefully) in the past.”

“Draghi’s government is unlikely to last long enough to see through such fundamental reforms. The next Italian parliamentary elections, which might bring the populist Lega into government, are due by mid-2023. And some suggest that Mr. Draghi might stand for election next year as the successor to Sergio Mattarella in the largely ceremonial role of President.”