Mario Draghi’s government ended sooner than many analysts expected.
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Mario Draghi is best known for saving the euro. But a much-needed bailout of the Italian economy ended prematurely as domestic politics emerged last month, making it increasingly difficult for him to govern.
In about a week, Italy went from having a stable government to preparing for September’s early elections, which could see the far right lead the next coalition in Rome. This perspective puts investors in question about Italy’s economic future and its wider role within European politics.
Draghi “was certainly a little tired of politics within the government,” an official who works for the Italian government, who preferred to remain anonymous due to political instability in the country and the sensitive nature of the comments, told CNBC.
Once the CEO of Goldman Sachs International, Draghi became Italy’s prime minister in February 2021 to lead a technocratic government, backed by four major parties across the political spectrum. His arrival in Rome was welcomed by European investors and officials, who desperately wanted to see a safe pair of hands at the helm of the eurozone’s third largest economy.
The former head of the European Central Bank has spoken out on several fronts, including drawing up a reform plan to get over 190 billion euros (194.52 billion dollars) from the EU. The disbursements are, however, tied to the completion of these reforms, so investors fear that the next coalition may not carry out Draghi’s plans and therefore may not receive all the money from Brussels.
The prime minister also re-launched vaccination efforts against Covid-19 and contributed to an economic recovery. But throughout his tenure, Draghi had to contend with a slew of political sensibilities.
What happened?
The collapse of his government came about because of those frailties at the heart of the government. It started with the Movimento Cinque Stelle (M5S), a leftist and populist party, which boycotted a vote on a package aimed at helping Italians cope with the rising cost of living. This may interest you : Departmental Press Briefing – July 19, 2022 – United States Department of State. The package included a controversial waste incinerator for Rome, against which M5S rallied vehemently.
The same anonymous source from CNBC said that the M5S has “a large following in Rome, not so much in the rest of the country, but this law has been a problem for this electorate”. By not voting for the broad package and blocking it, the party was essentially against the government they were a part of, the official said.
Draghi resigned after the vote stalled.
A second Italian official, who preferred to remain anonymous due to the delicate nature of the situation, said the move from M5S was “a significant decision”.
Draghi had “trusted this to be a government of national unity,” the official said. But with M5S abstaining from voting on the government bill, “Draghi felt it was becoming increasingly difficult to implement his program,” the official added.
Late in the evening of Wednesday, July 15, Italian President Sergio Mattarella rejected Draghi’s initial resignation and told him to build a new parliamentary consensus.
Over the next few days, hundreds of mayors signed a letter asking him to stay. Trade union and industrial leaders also unite to ask Draghi to remain in office. And there was an online petition signed by thousands of citizens who wanted it to stay.
If they said yes, [Draghi] 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 parliamentarians 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 she was surprised that Draghi asked for a new mandate to try to build unity once again. “To be honest, his speech was really harsh against the M5S and the League [party] … his goal was to clarify: if we have another government, we have to move forward without problems,” the source said.
“If they said yes, [Draghi] 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 pointed out that Draghi was “very worried” about being able to pass new laws in Parliament. Draghi was expected to end his term before next summer with parliamentary elections scheduled for June 2023.
What’s next?
But Italy is now preparing for a new vote on 25 September with a lot at stake. On the same subject : The harsh sentence of human rights defenders in Cuba – United States Department of State.
“If a right-wing coalition wins Italy’s political elections on September 25, and subsequently 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 broadly to future EU integration and joint debt issuance, ”Nomura economist George Buckley said in a research note last week.
The upcoming elections will be important not only to see where Italy’s finances and fiscal strategy go, but also whether Europe continues to raise new funds together.
The recovery plan was born due to the impact that the coronavirus blockade has had on European economies. This was so significant that the 27 members of the EU decided for the first time to jointly raise funds through the European Commission, the executive arm of the EU. Italy, because it has suffered the most from the pandemic, is receiving the largest share of the borrowed money.
However, if there are problems with the political situation of the greatest benefactor, that could stifle more joint loans later on, even when addressing climate change or the impact of the Russian invasion of Ukraine.
“The next Italian government is unlikely to question the country’s future in the euro zone, repeating the turmoil we saw after the 2018 elections. But it will likely adopt a more accommodative fiscal policy and have a harder time approving reforms, Jack Allen -Reynolds, senior economist for Europe at Capital Economics, said in a statement last week.
