Italian Prime Minister Mario Draghi's economic and political legacy : The Indicator from Planet Money When Mario Draghi saved the euro with a 2012 speech, the world was in awe. Then he was called in to lead Italy's six motley political parties through the pandemic, and turn around Italy's economy.

Super Mario meets his match in Italy

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Last week, Italy's government imploded.


UNIDENTIFIED PERSON #1: (Non-English language spoken).

WOODS: Central banker-turned-prime minister Mario Draghi resigned after a year and a half.


UNIDENTIFIED PERSON #1: (Non-English language spoken).

UNIDENTIFIED PERSON #2: (Non-English language spoken).


And what has been going on in Italy makes a lot more sense if you know about a term called vincolo esterno - external constraint.

ALESSANDRO SPECIALE: Oh, now, that's a classic one.

MA: Alessandro Speciale co-wrote a biography of Mario Draghi.

SPECIALE: This idea that Italy isn't able to choose on its own the right policies.

WOODS: Instead, Alessandro says, Italy chose external personal trainers, let's say, to help it restrain spending and reform its bureaucracy. The two big external trainers helping Italy get in shape - the European Union and the market. And at stake right now, a tantalizing 200-billion-euro pandemic support package dangling in front of Italy - if it can pass a bunch of reforms.


MA: And I'm Adrian Ma. Today's show - how vincolo esterno shaped Italy's modern economic history. It's a tragedy with one leading man who deeply believes in this way of solving Italy's problems - the economist turned politician Mario Draghi.


WOODS: In the early 1990s, Italy was in crisis. It was stagnating economically, and it had run up a large amount of government debt. And one reason cited was that a considerable chunk of the Italian economy was run through these big state-run conglomerate companies. Here's Alessandro Speciale again.

SPECIALE: The state played a huge role in the Italian economy - many companies from the energy sector to the telephone company.

MA: The government even owned manufacturing businesses. These state-owned conglomerates had complex organizational structures, and their goals weren't necessarily to, you know, deliver a great product at a cheap price. They became widely seen as inefficient and prone to corruption.

SPECIALE: Institutionalized bribery, basically - that's what they were talking about.

MA: The corruption was exposed in a sweeping probe against bribery and kickbacks for access to public contracts. Five thousand Italian officials were under suspicion at one point, and the majority of parliament was indicted.

WOODS: In steps Mario Draghi, an MIT-trained economist, as head of the Italian treasury. He's this seemingly aloof, kind of academic figure.

SPECIALE: He defined himself as a Catholic liberal or a socialist liberal - so, like, you know, free market, but at the same time, a care for - also for the social implications and to redress the inequalities that come from free markets.

MA: As head of the Treasury, Draghi advises the government on how to restrain spending and sell off those state-owned companies, like electric utilities. And the hope was that there would be an external constraint here - in this case, investors - investors who would help straightjacket these companies to be more efficient and productive.

SPECIALE: In general, the assessment of how he did in this job has been pretty positive. Italy was able to bring down its debt a bit with the proceeds of the sales, and there were never major corruption scandals linked to these sales. At the same time, he has been accused of overseeing the sell-off of the jewels of the crown of the Italian state, if you want to put it like that.

WOODS: Like, if you sold off the U.S. Postal Service, people would not be happy. Anyway, to implement this economic vision with less government spending and restrictions, Mario Draghi faced an uphill battle. So take the example of Italy's new prime minister at the time, Silvio Berlusconi. Historian Adam Tooze describes him like this.

ADAM TOOZE: The original populist, the original oligarchic populist, the real prototype for people like Donald Trump is Berlusconi. And he's elected, but can Berlusconi do Berlusconi things? Not really because the constraint binds - right? - because he's tied within the European system.

MA: The European system - the European Union is not really but kind of the United States of Europe with its own parliament and laws. And this institution, the EU, is Draghi's ally to try and shore up the Italian government's finances. The EU imposes budget rules. Italy starts paying down its debt. And then Italy joins the euro currency, basically meaning Italy's monetary policy is determined in Frankfurt, far away from Italy - vincolo esterno in action.

WOODS: But then 2008 - the global financial crisis. Countries around Europe - Portugal, Ireland, Greece, Spain, Cyprus and Italy - slip into foreign debt crises.

MA: And one of the big problems here is that because these countries share a common currency with Europe, they cannot devalue their currencies, which, if they could, it would be good for their exporters and provide a bit of stimulus. Also, the European Union and the International Monetary Fund are essentially demanding austerity. Vincolo esterno could be hurting now instead of helping.

WOODS: So, like, vincolo esterno is, like, the straightjacket when you're stuck in a hole in the ground. So it's not very helpful for pulling yourself back up out.

MA: Right. And you, like, have to be Houdini to basically figure a way out.

WOODS: Yeah. And Mario Draghi understood this when he's appointed to lead at the belly of the external constrainer itself - the European Central Bank, or the ECB.

TOOZE: It's not by accident that he's the man on the scene in 2012. At that point, the Italian political class desperately need one of theirs who understands what the stakes are.

WOODS: Investors were increasingly convinced that Italy and its peer countries wouldn't be able to pay their debts. And there's this moment when Draghi loosens the strings of the straightjacket over Europe. It's at this talk to investors in London, a lot of whom are skeptical of the entire European project.


MARIO DRAGHI: Pleasure to be with you today.

TOOZE: You should see his eyes at the moment that he gives the speech.


DRAGHI: The ECB is ready to do whatever it takes to preserve the euro.

WOODS: Draghi is saying to the struggling countries, like Italy and Greece, that the European Central Bank has your back. Essentially, we will buy your government debt if needed. And he's sending a very direct message to those financiers in London.

TOOZE: Just like, you bet against me, and you will rue the day that you bet against the ECB because I can tell you, we're serious. We've done the necessary work. And there are these people in London who just don't get it. They don't understand how significant the European project is and the historic significance of this project that his entire generation of Europeans is so committed to.

WOODS: Draghi's speech immediately sobers up the financial markets. The interest rates on the debts of countries like Italy start to drop, and investors stop betting on a default or a fragmentation of the euro. Draghi is dubbed Super Mario Draghi. And with the help of all the policymakers behind the scenes, he's seen as having saved the euro currency.

MA: And Italy does not default. But its growth over the next decade is really disappointing. Overall, the economy does not grow richer, and its youth unemployment rate is super high. I mean, we're talking about in the 30% range. Then the pandemic hits, and Italy is once again in crisis. So that's why, in 2021, Draghi is invited by the president of Italy to lead a bunch of political parties as prime minister. That brings us back to the package of reforms needed to get that 200 billion euros' worth of pandemic funding from the EU.

WOODS: Vincolo esterno is back, this time with some carrots and not just sticks.

MA: Carrot sticks?

WOODS: Yeah, it's both. The reform plan is things like making its taxi licenses more competitive, but it's also things like speeding up the court system, tax collection and even freeing up licenses to operate private beaches.

MA: But pushing against entrenched economic interests when you have a coalition of six different political parties across a wide ideological spectrum - I mean, it is not a recipe for political longevity.

WOODS: No. And after squabbles over a spending bill, these frustrations reached a boiling point last week, and Draghi resigned.


DRAGHI: (Non-English language spoken).

WOODS: After that big applause, he's getting a little emotional on the stage, and he's saying thank you. Sometimes, even central bankers use their hearts.

MA: Hey, you don't have to tell us. On this show, we know economists have heart.

WOODS: That is true.

MA: So over the next few months, we'll see whether a new government will lean into vincolo esterno and follow the EU's reform plan or whether it'll tear off the straightjacket.

WOODS: This episode was produced by Nicky Ouellet with engineering from Debbie Daughtry. It was fact-checked by Kathryn Yang. Viet Le is our senior producer. He edited this episode. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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