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What's Next? A Perspective on Italy Following the 13th Presidential Election

By Fernando Napolitano, President & CEO of NEWEST





Italians and international observers have witnessed a turbulent January 24 week

ending with the election of Sergio Mattarella to the Presidency of the Republic. He

will stay in office for the next 7 years. This is going to be, uncharacteristically, his

second term.


The Presidency of the Republic was once perceived as a symbolic institution

representing national unity. Recently, it has become one of the most incisive political

protagonists. Constitutional experts explain that the Presidential powers are elastic:

they could be, lawfully, expanded to make this institution a powerful referee. The

short-lived Italian governments, 67 in the 72 years since the constitution of Italy’s

Republic, coupled with the crises of the political parties and the rise of populism,

have made the Presidency of the Republic a central and diriment political player.

Citizens look at the Quirinale – the Roman hill hosting the Presidential palace-- for

stability and guidance. Internationally, it has become the most trusted and reliable

institution.


Among the powers, he appoints the President of the Council of Ministries (PCM)

following a consultation with the political parties. He must approve the list of

ministries proposed by the PCM before the vote of confidence by the upper and

lower houses. The President, furthermore, has to counter-sign the laws approved by

the parliament and can send them back for revision. He calls new elections if he

believes the government has exhausted all trust possibilities in parliament.

If there is no MP eligible to PCM, he can select a personality external to politics. This

happened in February 2021 with the appointment of Mario Draghi, the former head

of the European Central Bank (ECB). Mr. Draghi is leading a large coalition

government.


The increased international appreciation of Italy’s policies and standing are due to

Mr. Draghi. Unlike his esteemed technocratic predecessors, Mr. Draghi joined the

government with a formidable global reputation. He did provide leadership. He tamed

the pandemic and, among other achievements, contributed to smooth the dialogue

with the European Commission about the €200 billion of European Recovery funds

made available to Italy through 2026. Draghi’s’ government has committed to enact

important structural reforms and make strategic investments. To put this amount into

perspective, in 1948 Western Europe received from the US-led Marshall plan $140

billion USD in today’s dollars. The Recovery Fund is, literally, a once in a life time

opportunity to turn around and relaunch Italy.


So far so good. All 51 objectives set for 2021 have been achieved.


The disbursement of the second installment, due on 30 June 2022, presupposes the

achievement of 45 goals and objectives for a financial contribution and loans of

€24.1 Billion. Another 55 goals and objectives must be implemented by 31

December to receive the third 2022 tranche of €21.8 billion.


So, What is to be Expected From Italy?


Italy remains a two-faced Janus. Politically, it is looking backward. Business-wise,

Italy is forward-looking and remains a great investment opportunity for the short and

long term.


The government will go through the shenanigans of the political system. This will

dominate, by and large, international headline news. General elections in 2023 will

be held in the spring. Draghi’s government has a full year ahead, though turbulent.

The large coalition political forces have divergent views on the reforms. While Mr.

Draghi is fastening his seat belt, the size of the public debt,160% of GDP, and the

need for the European recovery funds are, cynically, the best insurance for his

endurance in office.


Real politik dictates that despite the rhetoric, political parties are toothless and very

concerned in recouping the citizens’ trust. Abstention in Italy is at a record level:

40%. An abandonment by Draghi would be unjustified and unforgivable for the

majority of Italians. Political parties do realize that too much is at stake.

On the other hand, Italy’s GDP grew 6.5% in 2021 and is expected to grow an

additional 4% in 2022. The spike in energy prices, however, and a soaring inflation –

4%-- the highest since the introduction of the Euro— represent a concern. The

reforms, under any scenario, will provide additional resources and remove many of

the obstacles that have chained the Italian economic growth in the past.

Italy’s stock exchange market capitalization accounted for 36.7% of its nominal GDP

in Dec 2020. It was 60% in Germany and 107% in France.


The small to medium enterprises remain the principal engine of wealth creation and

economic growth. They represent an attractive opportunity for foreign investors.

Family-owned businesses need to grow in size to keep on competing in the global

market.


According to Mergermarket, the first half of 2021 witnessed 294 transactions – a rise

of 32% compared to the first half of 2020, for a total of €50 billion, the highest half-

year rise since the first half of 2007. In Private Equity, year-over-year value rose to

€28.4 billion in the first half of 2021. In 2020 there were 121 PE buyouts totaling

€17.7 billion.


Four sectors dominated Italian M&As between the start of 2020 through

the of the first half of 2021: Industrials & Chemicals, Consumer, TMT, and Financial

Services.


Italy and the Long Term.


In terms of vision, one of Mr. Draghi’s remarks at the yearly Italian Ambassadors’

Conference in Rome went unnoticed. He envisioned a European Common Defense

System complementary to NATO. This statement echoes a similar view expressed

by French President Emanuel Macron. US sensitivities aside, and waiting for the

new German’s Chancellor view, this idea is gaining consensus and will send shock-

waves through the European and Italian industrial landscape. European industries

are subscale to the US and China. In terms of market capitalization, there is no

European company in the world’s top ten. In the strategic financial sector, the largest

European bank, BNP Paribas, falls at #82 in the world. JP Morgan is #12. Hence, the

vision for a common defense system, while relevant and strategic, represents a first

step in opening a dialogue between policy makers and industries on potential large-

scale M&As and European competitiveness. Airbus is an interesting benchmark.


NEWEST will be following the evolution closely.

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