Anadolu Agency | Anadolu Agency | Getty Images Mario Draghi is best known for saving the euro. But a long-awaited rescue of the Italian economy ended prematurely when domestic politics came to the fore last month, making it increasingly difficult for him to govern. In the space of about a week, Italy has gone from a stable government to preparing for early elections in September — which could see the far-right head the next coalition in Rome. That prospect has investors questioning Italy’s economic future and its broader role in European politics. Draghi was “definitely a little tired of the politics within the government,” an official working for the Italian government told CNBC, speaking on condition of anonymity because of political instability in the country and the sensitive nature of the comments. Once chief executive of Goldman Sachs International, Draghi became Italy’s prime minister in February 2021 to lead a technocratic government, supported by four main parties across the political spectrum. His arrival in Rome was welcomed by investors and European officials, who were desperate to see a safe pair of hands leading the eurozone’s third-largest economy. The former head of the European Central Bank has succeeded on several fronts, including putting together a reform plan to get more than 190 billion euros ($194.52 billion) from the EU. The disbursements, however, are tied to the completion of those reforms , so investors fear that the next coalition may not follow Draghi’s plans and therefore not receive all the cash from Brussels. The Prime Minister also revived the Covid-19 vaccination efforts and contributed to the economic recovery. But throughout his tenure, Draghi has had to contend with a number of political sensitivities.
What happened?
The collapse of his government came about because of these weaknesses at the heart of the government. It started with the Five Star Movement (M5S), a leftist and populist party, boycotting the vote on a package aimed at helping Italians cope with the rising cost of living. The package included a controversial waste incinerator for Rome, which the M5S strongly opposed. The same unnamed CNBC source said M5S has “big fans in Rome, not so much in the rest of the country, but this law was a problem for this electorate.” By not voting for the far-reaching package and blocking it, the party was essentially against the government it was part of, the official said. Draghi tendered his resignation after the deadlock in the vote. A second Italian official, who preferred to remain anonymous because of the sensitive nature of the situation, said the move from M5S was “an important decision”. Draghi had “trusted that it was a government of national unity,” the official said. But with M5S abstaining from voting on the government’s bill, Draghi felt [it] it was becoming increasingly difficult to implement his programme,” the official added. By late afternoon on Wednesday July 15, Italian President Sergio Mattarella had rejected Draghi’s initial resignation and told him to build a new parliamentary consensus. In the following days hundreds of mayors had signed a letter asking him to stay. Union leaders and industrialists are also rallying to call on Draghi to stay in power. And there was an online petition signed by thousands of citizens who wanted him to stay. If they said yes, [Draghi] he had all the power he wanted. The following week, Draghi returned to the Italian parliament and asked lawmakers for a new mandate. “Are the parties and you MPs ready to rebuild this pact?” he told the Senate on July 20. “Italy needs a government that can move quickly and efficiently,” he told lawmakers. CNBC’s first source said they were surprised Draghi asked for a new mandate to try to rebuild unity. “To be honest, his speech was very harsh against M5S and Lega [party] … his aim was to make it clear: if we form another government, we must continue without problems,” the source said. “If they said yes, [Draghi] he had all the power he wanted. if they said no, he could resign without being accused of leaving the country,” the official said. The second CNBC source stressed that Draghi is “very concerned” about being able to pass new laws in Parliament. Draghi was due to finish his term before next summer with parliamentary elections expected in June 2023.
What’s next?
But Italy is now preparing for a new vote on September 25 with much at stake. “If a right-wing coalition wins Italy’s general election on September 25 and then abandons economic reforms, it could jeopardize not only Italy’s access to EU fiscal support and the ECB’s new anti-fragmentation tool, but more generally future EU integration and joint debt issuance,” George Buckley, economist at Nomura, said in a research note last week. The upcoming elections will matter not only to see where Italy’s finances and fiscal strategy are headed, but also whether Europe will continue to raise new capital together. The recovery plan came about due to the impact that the coronavirus lockdowns had on European economies. This was so important that the 27 EU members decided to pool money together through the European Commission, the EU’s executive arm, for the first time. Italy, because it suffered the most from the pandemic, is receiving the biggest chunk of the money it borrowed. However, if there are problems with the political situation of the biggest benefactor, then this could stifle more public borrowing further down the line, including when dealing with climate change or the fallout from Russia’s invasion of Ukraine. “Italy’s next government is unlikely to call into question the country’s future in the eurozone, in a repeat of the turmoil we saw after the 2018 election. But it will likely pursue a looser fiscal policy and find it harder to pass reforms. Jack Allen-Reynolds, senior economist for Europe at Capital Economics, said in a note last week.
