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Italian Prime Minister Mario Draghi. Picture: REUTERS/REMO CASILLI
Italian Prime Minister Mario Draghi. Picture: REUTERS/REMO CASILLI

Italian Prime Minister Mario Draghi tried to strong-arm his fractious coalition allies into line. But his plan backfired and Italy’s government is now on the brink of collapse, leaving little alternative to snap elections in the northern hemisphere autumn and months of political chaos.

Three of his coalition partners withdrew their support Wednesday night after Draghi forced a confidence vote by threatening to quit. And while Draghi didn’t immediately step down after the failed vote, the move effectively ended the unity government he’s been running since February 2021.

The former European Central Bank chief is expected to resign Thursday. If President Sergio Mattarella accepts his resignation, emergency elections could be called for early October, the first time the country would go to the polls in the fall. 

“The only way, if we want to remain together, is to rebuild this pact from scratch, with courage, altruism, credibility,” Draghi told lawmakers ahead of the confidence vote. In the end, three of Draghi’s government allies, the populist Five Star Movement, the nationalist League and the centre-right Forza Italia abandoned him. 

Investor jitters

The situation will be closely watched in Frankfurt, where the ECB is set to unveil a new crisis-fighting tool designed to protect highly indebted countries like Italy from speculation. 

The uncertainty is likely to make bondholders increasingly nervous, raising the pressure on the European Central Bank to announce a credible anti-fragmentation tool on Thursday.-- David Powell, senior euro-area economist.

Italian bonds tumbled on Thursday, sending the 10-year yield surging 18 basis points to 3.57%, the highest since June. German peers are little changed leaving the spread between the pair — a major gauge of risk in the region — 18 basis points higher at 232 basis points. FTSE MIB futures slumped 2.9%, strongly underperforming Euro Stoxx futures.

Italian governments are notoriously unstable and Draghi led the 67th cabinet the country has had in just over 75 years. And while Draghi will likely remain caretaker prime minister until the next vote, the government will be dramatically weakened, risking its legislative agenda. 

Draghi — an unelected technocrat picked to lead Italy out of the coronavirus crisis — has been a reassuring figure for investors during a turbulent time for the euro area. Europeans are bracing for a recession amid rising inflation and an energy crisis fomented by Russia’s war in Ukraine. 

Reform agenda

During his 18 months in power, Draghi devised a plan of reforms agreed with the EU to free up Italy from red tape and boost competition. That was instrumental for the country to receive €200bn in aid from the bloc. Failure to pass the proper reforms could put that money at risk. 

Paolo Gentiloni, the EU’s economy commissioner, warned “a perfect storm” could lie ahead for Italy.

Italian parties have now entered campaign mode. The centre-right, which acted in lock-step during the heated Senate debate Wednesday, has most to win from an earlier vote. Based on current polls, a right-wing tie-up led by Giorgia Meloni’s Brothers of Italy would win a snap election if its members stick together.

Even though Giuseppe Conte’s Five Star triggered the collapse by withdrawing government support last week, its influence is poised to wane. The party’s popularity has plummeted since it entered government and it would likely lose seats in a new election. 

More stories like this are available on bloomberg.com
Bloomberg


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