Italy’s new prime minister, Mario Draghi, has a well-earned reputation for turning around difficult situations. But can he reverse Italy’s relative economic decline? And what does his program mean for Italian bond yields?

As president of the European Central Bank (ECB) Mario Draghi made his name for doing “whatever it takes” to save the euro. Now, as Italy’s prime minister, he faces another daunting challenge.

Italy’s Growth Has Lagged Peers

It will be a tough task to transform Italy’s longer-term outlook. The Italian economy has performed poorly in recent years. Real per capita GDP has lagged developed-world peers (Display below, left), and the relative decline has been stark against euro-area comparators such as Germany (Display, right).

Italy’s per capita GDP growth has lagged developed-market peers, including euro-areas peers - notably Germany.

Governance Is Key

Our research indicates that effective sovereign governance has a direct link to positive economic outcomes. As part of our ESG scoring framework, we regularly calculate sovereign governance ratings including the principal euro-area nations (Display, below). Our results suggest that Italy’s relative decline is rooted in deep-seated structural weaknesses. These have weighed more heavily on growth since Italy joined the euro in 1999, losing the safety valve of periodic currency realignment.

Southern European countries including Italy are at the foot of AB’s governance table for developed-market nations.