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How Italy’s Draghi Government Collapsed


The government of Mario Draghi ended earlier than expected by many analysts.

Anadolu Agency | Anadolu Agency | Getty Images

Mario Draghi is best known for saving the euro. But a coveted bailout of Italy’s economy ended prematurely when domestic politics came to the fore last month, making it increasingly difficult for him to govern.

In the space of around a week, Italy has gone from having a stable government to preparing for a snap election in September – which could see the far right leading the next coalition in Rome. This prospect has investors questioning Italy’s economic future and its broader role in European politics.

Draghi “was definitely a little tired of politics in government,” an official working for the Italian government, who preferred to remain anonymous due to the political instability in the country and the sensitive nature of the comments, told CNBC. .

Formerly the managing director of Goldman Sachs International, Draghi became Italy’s prime minister in February 2021 to lead a technocratic government, backed by four main parties from all political stripes. His arrival in Rome was welcomed by investors and European officials, who were desperate 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 delivered on several fronts, including crafting a reform plan to secure more than 190 billion euros ($194.52 billion) from the EU. Disbursements are tied to the completion of these reforms, however, so investors fear that the next coalition will not follow through on Draghi’s plans and therefore will not receive all the money from Brussels.

The Prime Minister has also revived efforts to vaccinate against Covid-19 and contributed to an economic rebound. But throughout his tenure, Draghi has had to wrestle with a host of political sensitivities.

What happened?

The collapse of his government came about because of these fragilities at the heart of government. It started with the left-wing, populist Five Star Movement (M5S) boycotting a vote on a package to help Italians cope with the soaring cost of living. The package included a controversial waste incinerator for Rome, which the M5S fiercely rallied against.

The same anonymous CNBC source said M5S had “great success 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 broad package and blocking it, the party was essentially against the government of which it was a part, the official said.

Draghi tendered his resignation after the vote deadlocked.

A second Italian official, who preferred to remain anonymous due to the sensitive nature of the situation, said M5S’ departure was “an important decision”.

Draghi had “confidence that this was a government of national unity”, the official said. But with the M5S abstaining in the vote on the government bill, “Draghi felt [it] was becoming more and more difficult to implement its program,” the official added.

Late Wednesday evening, July 15, Italian President Sergio Mattarella 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 and industrial leaders are also uniting to ask 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] had all the power he wanted.

The following week, Draghi returned to the Italian parliament and asked lawmakers for a new term. “Are the parties and you parliamentarians ready to rebuild this pact? he told the Senate on July 20. “Italy needs a government that can act quickly and effectively,” he told lawmakers.

CNBC’s first source said he was surprised that Draghi had asked for a new term to try to rebuild unity. “To be honest, his speech was really tough against M5S and Lega [party] … his aim was to make it clear: if we make another government, we must continue without problem,” the source said.

“If they said yes, [Draghi] had all the power he wanted; if they said no, he could resign without being blamed for leaving the country,” the official said.

CNBC’s second source pointed out that Draghi was “very worried” about being able to pass new laws in parliament. Draghi was due to complete his term before next summer with legislative elections scheduled for June 2023.

And after?

But Italy is now preparing for another vote on September 25 with a lot at stake.

“If a right-wing coalition were to win the Italian legislative elections on September 25 and then abandon economic reforms, this could jeopardize not only Italy’s access to EU budget support and the new anti-fragmentation tool of the ECB, but more generally future European integration and joint debt issuance,” George Buckley, an economist at Nomura, 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 will continue to raise new funds together.

The recovery plan grew out of the impact the coronavirus lockdowns have had on European economies. It was so important that the 27 EU members decided to raise funds jointly through the European Commission, the executive arm of the EU, for the first time. Italy, because it has suffered the most from the pandemic, receives most of the borrowed money.

However, if there are problems with the political situation of the biggest benefactor, it could stifle more joint borrowing later, including to combat climate change or the impact of the Russian invasion of Ukraine. .

“The next Italian government is unlikely to cast doubt on the country’s future in the eurozone, in a repeat of the turmoil we saw after the 2018 elections. But it will likely pursue a looser fiscal policy and have harder to push through reforms,” ​​Jack Allen-Reynolds, senior economist for Europe at Capital Economics, said in a note last week.

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