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MNI (Brussels)

Mario Draghi's appointment as Italian prime minister may revive hopes for a permanent relaxation of government borrowing rules under the eurozone's Stability and Growth Pact and kick-start stalled efforts to establish European Banking Union, EU officials told MNI.

The respected former European Central Bank president, lionised for his role in preserving the single currency at the height of the eurozone crisis, will add heft to voices calling for EU fiscal stimulus to be maintained through next year at a time when other major leaders are losing influence, they said.

"As the man who saved the euro and saved Italy, he is going to bring a lot to these discussions," one official told MNI. "He could quickly become the dominant figure at European summits with (German Chancellor Angela) Merkel stepping back ahead of retirement and a weakened (French President Emmanuel) Macron focusing on his campaign for re-election in 2022."

"I don't think anyone (in the EU) will be disappointed to have Mario Draghi leading the government," said one senior EU source.

RIFT OVER DEBT RULES

Up until now, plans to redesign the EU's fiscal rules have been stalled due to a rift between Economic Affairs Commissioner Paolo Gentiloni and EU Commission Vice President Valdis Dombrovskis, with the former pushing for changes which would recognize the sustainability of higher levels of public debt in the current context of low interest rates. Fiscally hawkish countries are also thought likely to resist change in such a direction. Draghi's advent could change the political dynamics on such questions, some EU officials believe.

Even if the rift over SGP reform should continue – and another year of applying its general escape clause may prove to be the path of least resistance - Draghi is at least expected to provide a powerful tailwind to the growing case for continuing fiscal stimulus through 2022. Eurozone finance ministers are due to take a collective view on fiscal policy by the summer.

"It's likely that fiscal stimulus will be maintained, but with (national budget) deficits at 1-2% of GDP rather than the 4-5% we have seen through the crisis," said one source close to the state of fiscal policy talks. "I've also heard it said that EU leaders would be ready to maintain fiscal accommodation across the EU to help Macron in a presidential election year. Rather that, than risk a far-right victory at the polls."

Draghi could also revive stalled efforts towards forging eurozone banking union, said one official, adding that he could focus on reforming the regulatory treatment of banks' holdings of sovereign bonds. Until now, calls for bonds to be counted as risky assets on lenders' balance sheets have stalled in the face of resistance from countries whose banks have large sovereign holdings, such as Italy.

An aide to the incoming Italian prime minister confirmed to MNI that banking union will be on his agenda.

Draghi could also push for more radical use of emergency EU Covid recovery funds, maybe channeling money directly to small-and-medium-sized enterprises to prevent bankruptcies rather than mitigating the fallout, EU sources said. Officials believe he could offer a similarly pre-emptive approach to bank bailouts, though they had no further details.

CREDIBILITY AT HOME

At the same time, Draghi has the credibility and gravitas to convince Italians that reforms are needed to accompany aid from Brussels.

The former ECB president has already set out radical ideas for securing post-lockdown recovery, pointing to the likelihood of private debt cancellation and tolerance of higher public debt levels.

How a Draghi-led technocratic government manages the EU's Covid funds within the country and more widely will be a key early litmus test of his capacity to bang heads together.

The EU Commission is wrestling with member states to wring as much conditionality out of national plans to access the funds as possible. So far, Spain's is regarded as a benchmark while France's has been much criticised for containing measures which would have been funded by the national budget anyway.

While his control of Italy's Recovery and Resilience Facility/Next Generation funds should bolster his political power in the short term, Draghi will need to show also that he will improve the opaque governance around plans for using the money, a failing which brought down former Prime Minister Giuseppe Conte.

(Additional reporting by Santi Pinol)

MNI Brussels Bureau | david.thomas.ext@marketnews.com
MNI Brussels Bureau | david.thomas.ext@marketnews.com
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