EU warned: Either Italy succeeds or Brussels bloc faces ‘threat of crises like 2011’

Mario Draghi: Eurozone economy weaker than expected

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European Commission President Ursula von der Leyen will travel to Rome today to rubber stamp Mario Draghi’s plan on how to spend the biggest chunk of the EU’s Recovery Fund.

All eyes will be on the Italian Prime Minister’s ability to prove solidarity among member states as he will deploy €209 billion in grants and loans to boost the Italian economy.

Mr Draghi on Friday said the protracted economic uncertainty due to the COVID-19 pandemic means that the case for monetary and fiscal expansion remains compelling.

The Italian leader, a former European Central Bank chief who leads a national unity administration in Italy, told an economic forum in Barcelona that the aim should be to bring economic activity back to “at least” the trajectory it had before the pandemic.

He said: “With higher levels of activity than before, we can compensate for the rise in debt that took place during the health crisis.”

He added that investors need to be reassured that fiscal prudence will return “as soon as the recovery is self-sustained.”

But the fiscal union he so boasts about could simply “dissolve” unless his government ensures the higher economic growth path is pursued.

According to Andrea Capussela, a visiting professor at the London School of Economics, “should Italy miss the higher growth path, the plan will have failed: the opportunity for agreeing any form of fiscal union would dissolve, most probably, and the Union would again face the threat of crises similar to that of late 2011”.

Mr Capussela wrote in a paper titled “Italy and Europe will rise or fall together” that the Italian Prime Minister has four key reforms to get right in order to succeed.

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He said: “Those of the public administration, the justice system, the regulatory system, and the promotion of competition.

“Each of them, however, has one or more comparable predecessors, similarly ambitious, in the past three decades: they were generally well-conceived, as I said, but the country’s decline proceeded unperturbed.

“If the equilibria could subdue those reforms, therefore, in the absence of a convincing vision to support their present successors, which alone could change society’s expectations, it seems hard to expect significantly better results.”

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The European Union raised 20 billion euros from a 10-year bond last week in the largest-ever single-tranche institutional debt sale that saw near-record demand of 142 billion euros, taking a big step towards establishing itself as a major debt issuer.

The bond rallied sharply in the secondary market is further evidence of strong demand, with its yield – 0.086 percent at pricing – down 5 basis points to around 0.04 percent on Wednesday.

The rally was similar to that following the EU’s first issuance last October backing the SURE unemployment scheme, a smaller support programme.

With demand far above the deal size, much investor appetite was left unsatisfied, bankers involved with the deal said.

It attracted such large demand at issuance even though the EU capped orders it considered from hedge funds, which, inflating their demand to secure better allocations, have been a major driver of large bond sale order books.

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