By Nouriel Roubini, Brunello Rosa

With its poor track record of managing EU funds, Italy’s recovery plan will be a major test for the future of EU policymaking more generally. While it is widely agreed that Prime Minister Mario Draghi must remain on the scene to oversee the plan’s implementation, in what capacity would he be most useful?

NEW YORK – In January 2022, the Italian parliament (together with regional representatives) will cast secret ballots to elect the country’s next president, and its choice will have much wider implications than most people realize. In fact, we have identified the Italian presidential election as one of the three votes that could determine the fate of the European Union in the coming years – the other two being the German federal election held in September and the French presidential and parliamentary elections next April and June, respectively.

It is generally believed that the Italian president performs only a ceremonial role (like the German president). In fact, although the Italian constitution establishes the Republic as a parliamentary democracy – with the government dependent on the confidence of the elected legislature – that system obtains only during periods of relative “tranquility.†When the political system is dominated by well-functioning parties that are capable of securing a solid majority in parliament, the president’s role is relatively marginal. But in “turbulent†periods, when the political system is weak and incapable of delivering viable solutions, the president becomes a deus ex machina.

The two most important tools at the president’s disposal are the power to appoint the prime minister and approve the prime minister’s cabinet; and the power to dissolve parliament after having “heard†the speakers of the two chambers. Moreover, as the signer of virtually all laws and decrees, the Italian president also has the power to send legislation back to parliament. The president also serves as commander in chief of the army and as the head of the governing body of the judiciary.

Owing to these roles, it has long been recognized that there are two lines of command in Italy. The first is headed by the prime minister, who exercises power through government ministers and the wider political system. The prime minister is formally in charge of domestic affairs and has the greatest impact on people’s daily lives. Political legitimacy is key to the functioning of this office.

The second line of command is more institutional (and implicit) than political. The president is responsible for Italy’s relationship with Europe (including its adherence to EU treaties and rules) and with allies like the United States. The president wields influence through the technocratic structures of the Ministry of Economy and Finance, particularly the all-powerful Accounting Office (Ragioneria Generale dello Stato) and the Bank of Italy. On past occasions when the Italian political system seemed to veer toward populist anti-European positions, it was the president who reassured allies of the country’s ongoing commitment to international agreements.

Italy’s next presidential election is coming at a crucial moment. Approved to receive nearly €200 billion ($225 billion) in conditional grants and cheap loans from the €750 billion Next Generation EU fund, Italy will be embarking on an ambitious program of reform between 2022 and 2026. By showing that intra-EU redistribution can be carried out efficiently and effectively, Italy could fundamentally change EU politics, setting the stage for a permanent redistribution mechanism and the creation of a fiscal union.

The policy implications would be profound. The EU would have greater means to tie fiscal support to national structural reforms, with the aim of increasing the bloc’s growth potential. At the same time, monetary policy would come to play a relatively smaller role, with the European Central Bank focusing its attention almost exclusively on controlling inflation, rather than on pursuing backdoor measures to share risk in the absence of a common Treasury.

But if Italy proves unable to spend the EU funds effectively, Next Generation EU will be remembered as a one-off exercise. Providing economic stimulus will continue to be a task for national-level fiscal policymakers and the ECB.

It is therefore crucial that Italy succeed in making its economy more competitive and more efficient. This outcome is far from assured, given its relatively poor past track record of deploying EU funds. The European Commission’s approval of Italy’s recovery plan owes much to the fact that former ECB President Mario Draghi is now Italy’s prime minister. The question, then, is how best to ensure that Draghi will continue to play a leading role in implementing the reform agenda.

There are two schools of thought. The first considers Draghi well-placed to continue serving as prime minister at least until the end of the current parliament in February 2023. That would allow him to oversee the initial implementation of the plan while centrist parties maneuver to provide a political platform that would furnish him with a new majority in the next general election. He would have at least until 2023 – and perhaps until 2028 – to implement the Next Generation EU agenda.

The second school of thought thinks it would be better for Draghi to become president. From the top of the second chain of command, he would be able to oversee many elements of the reform plan for the next seven years, ensuring that Italy adheres to EU treaties – in letter and in spirit – even if a new Euroskeptical government were to gain power in 2023.

The first option seems easier, because the current government will remain unaffected by the 2022 presidential election; but it could run into trouble the following year, because there is no guarantee that Draghi would return as prime minister. The second scenario would depend on Draghi winning the secret ballot for the presidency, which also cannot be guaranteed; but it would lock in his presence as head of state for the next seven years. In our view, that seems preferable.

Italy remains the weakest link in the eurozone, which means that Italian policymaking and the decision-makers behind it will be key to the EU’s survival and prosperity in the coming years. If populist parties were to return to power with debt and deficit levels already so high, Italy’s membership in the eurozone could be cast into doubt, auguring all kinds of market disruptions. Far from a pro forma ritual, the upcoming Italian presidential vote could not be more consequential.