How the Draghi government collapsed in Italy

Mario Draghi’s government came to an end earlier than expected by many analysts.

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

In the space of about a week, Italy has gone from having a stable government to preparing for early elections in September, in which the far right could be in charge of the next coalition in Rome. This prospect has investors questioning Italy’s economic future and its broader role in European politics.

Draghi “was certainly a bit tired of politics within the 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.

Once the managing director of Goldman Sachs International, Draghi became Italian 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 were desperate to see a safe pair of hands at the helm of the euro zone’s third-largest economy.

The former head of the European Central Bank delivered on several fronts, including drawing up a reform plan to obtain more than 190 billion euros ($194.52 billion) from the EU. However, the disbursements are linked to the completion of these reforms, so investors fear that the next coalition will not go ahead with Draghi’s plans and thus receive all the cash from Brussels.

The prime minister also revived vaccination efforts against covid-19 and contributed to an economic rebound. But throughout his tenure, Draghi had to wrestle with a host of political sensitivities.

What happened?

The collapse of his government came about because of those fragilities at the heart of the government. He started with the Five Star Movement (M5S), a left-leaning populist party, which boycotted a vote on a package intended to help Italians deal with rising costs of living. The package included a controversial waste incinerator for Rome, which M5S vehemently protested against.

The same anonymous CNBC source said that M5S has “a lot of supporters 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 sweeping 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 stalled.

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

Draghi had “trusted that this was a government of national unity,” the official said. But with M5S abstaining from voting on the government bill, “Draghi felt [it] It was getting more and more difficult to fulfill his program,” the official added.

Late in the afternoon of Wednesday, July 15, Italian President Sergio Mattarella rejected Draghi’s initial resignation and told him to build a new parliamentary consensus.

In the days that followed, hundreds of mayors had signed a letter asking him to stay. 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 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 parliamentarians ready to rebuild this pact?” he testified in 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 term to try to build unity once again. “To be honest, his speech was very harsh against M5S and the Lega [party] … his goal was to make it clear: if we make another government, we have to go on smoothly,” the source said.

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

The second CNBC source stressed that Draghi was “very worried” about being able to pass new laws in Parliament. Draghi was due to finish his term before next summer and parliamentary elections are expected in June 2023.

Whats Next?

But Italy is now preparing for a new vote on September 25 with much at stake.

“If a right-wing coalition were to win Italy’s general election on September 25 and then abandon economic reforms, it could jeopardize not only Italy’s access to EU fiscal support and the ECB’s new anti-fragmentation tool, but more in general future integration in the EU”. 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 will go, but also whether Europe will continue to raise new funds together.

The recovery plan came about due to the impact the coronavirus lockdowns had on European economies. This was so significant that the 27 EU members decided to jointly raise money through the European Commission, the EU’s executive arm, for the first time. Italy, because it suffered the most from the pandemic, is receiving most of the borrowed money.

However, if there are problems with the political situation of the largest benefactor, this could stifle more joint lending in the future, even when addressing climate change or the impact of the Russian invasion of Ukraine.

“Italy’s next government is unlikely to cast doubt on the country’s future in the euro zone, in a repeat of the turmoil we saw after the 2018 elections. But it will likely have a looser fiscal policy and will find it more difficult to approve reforms. Jack Allen-Reynolds, senior Europe economist at Capital Economics, said in a note last week.

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