Posted on Jul 22, 2022 at 6:14 am. Updated July 22, 2022 at 9:06 am.
Italian Prime Minister Mario Draghi sent a shockwave across Europe and markets by announcing his resignation on Thursday morning, terrified to see the cost of his debt soaring almost immediately. Mario Draghi’s departure from the stage comes at the worst possible time for Italy, which must reduce its dependence on Russian gas and undertake difficult reforms to receive funds from the European stimulus package.
Rebuilding the Italian political landscape is bound to be difficult given the current electoral rules. The elections, which will take place in September or October, open up the possibility of very different coalitions. Ten questions to understand the political causes of this unprecedented crisis and measure its economic and financial consequences.
1. Why did Mario Draghi’s allies drop him?
Enrico Letta’s Democratic Party is the only one that has remained loyal to him. The national unity coalition he led had been plagued by serious tensions for several months. In view of the forthcoming parliamentary elections, which were initially scheduled for next spring, each party wanted to regain a certain degree of autonomy.
Matteo Salvini’s league first, concerned by far-right rival party Fratelli d’Italia’s stunning progress in the polls. It has repeatedly hampered Mario Draghi’s efforts to reform the pension system or liberalize the economy.
So the Five Star Movement, which is in the middle of a crisis. The party is helpless, the victim of its repeated electoral setbacks and a split that led to the loss of a quarter of its parliamentarians last June. Challenging Mario Draghi allowed him to reunite his electoral base, which saw his favorite issues as being neglected by the government.
Silvio Berlusconi’s Lega and Forza Italia, aware that electoral intentions are overwhelmingly in favor of the centre-right, have decided to seize the opportunity of the crisis to anticipate elections which they believe will be won by a wide margin be able.
2. What is the political calendar like now?
The government remains in office to manage day-to-day affairs. President Sergio Mattarella has 70 days to dissolve parliament and call new general elections. Three dates are planned, September 18th and 25th or October 2nd. The time is not ideal because it is traditionally devoted to preparing the household, which is always difficult in Italy.
The constitutional law stipulates that the budget must be submitted to Parliament by October 15. A date that could be brought forward before the vote to allow Mario Draghi’s last act in power. Negotiations to form a government promise to be complex. A new manager could emerge before Christmas. Political parties are already lining up for what the press has dubbed “campaigns under the roof”.
3. Which party(s) will be able to govern the country?
Since the electoral system is essentially proportional, the new mandate requires the formation of alliances between the different parties. They are currently difficult to bind. On the left, the rapprochement between the Democratic Party and the M5S to set up a “progressive camp” has broken down. The Democratic Party, on the other hand, has only suffered setbacks since winning the 2018 general election and is even at risk of disappearing following its splits and internal divisions.
The right emerges as the big favorite, but opinions are also divided. Silvio Berlusconi’s Forza Italia is in full decline and stagnating below the 10% threshold. Matteo Salvini’s league is also in sharp decline: it is now capped at 17%. The post-fascist party of the “Italian Brothers”, led by Giorgia Meloni, is on the rise. She is the only one to have remained in opposition throughout the experience of the Draghi national unity government, and she benefits from the highest voting intentions in the polls (around 22%).
Giorgia Meloni claims leadership of the centre-right coalition, which Silvio Berlusconi and Matteo Salvini deny him. But the right has always shown its pragmatism by silencing its pre-election disagreements. Giorgia Meloni could thus become the first female president of the board of directors.
4. Did Mario Draghi have time to launch the promised modernization reforms?
During these seventeen months in power, many projects were launched to modernize the administration and especially the judiciary. However, the revision of taxation and the liberalization of certain services and transport have not taken place. Ditto pension reform: all these projects were planned for the second half of 2022.
5. Will the promise of a universal income and a minimum wage still be kept?
Mario Draghi had decided to embark on a major reform of social shock absorbers soon, through the creation of a citizen’s income. A monthly allowance of around 500 euros had already been introduced to help the poorest deal with the Covid crisis. It should be made permanent, but the promised overhaul may not happen any time soon. If the right, which is very critical of this measure, wins the elections, the citizens’ incomes will be finally condemned.
The other major reform promised was the introduction of a minimum wage. Italy is one of the last countries in the European Union that does not have a minimum wage. Mario Draghi had just resumed social dialogue on the subject. The project is also suspended.
6. Why this political instability in Italy?
The Italian political system produces political instability as surely as a coffee maker produces nectar. The “guilt” of a political system marked by the fear that after fascism one party will completely rule the country: since 1945, the average lifespan of an Italian government has been thirteen months.
On the one hand, this can be explained by “perfect bicameralism”, i.e. the fact that the Senate has as many powers as the National Assembly, which is a source of blockages. And on the other hand, through the election of deputies and senators by full proportional representation according to lists in about twenty constituencies, which favors the fragmentation of political forces.
A recent reform introduced first-past-the-post elections for a third of MPs and a bonus for the coalition and political party that prevailed to help it win a majority. Unfortunately, this is not enough to dissuade the small formations who are members of a coalition in power (the one led by Mario Draghi had eight parties) from leaving on the slightest pretext in the hope of winning during the following general elections expand …
7. Has Italy gotten any better since Mario Draghi arrived?
“Super Mario”, as the financial markets dubbed him during his presidency of the European Central Bank, came to power in Italy on the back of a crisis in February 2021, rather than after elections. He was supported by the majority of elected officials, but this coalition was eclectic, made up of left and right parties. Their mandate was therefore unclear. Reforms have advanced, but Italy has not become a different country and remains the “sick man” of Europe.
Mario Draghi was able to revive the economy after the Covid, allowing the country to benefit from the funds of the European economic stimulus plan. As a result, the unemployment rate fell to 8.1% of the labor force in May. But less than 60% of Italians aged 15-64 are employed, one of the lowest figures in Europe. And unlike France, Italy has not returned to pre-Covid employment levels. Last May there were still 50,000 jobs missing.
Public debt is almost 150% of GDP. To deal with very high inflation, the CEO has been opening the budget floodgates since last February. Unlike in France: The special tax on the super profits of energy companies finances a large part of the measures to support purchasing power.
8. Is there a risk of a new crisis in the euro zone due to the political situation in Italy?
This is the major fear of the ECB, Italian politicians and investors: that the rise in interest rates on Italian sovereign debt will result in a repeat of the eurozone sovereign debt crisis of 2012. Since the crisis began, they have tended to climb politically. The 10-year rate ended Thursday at 3.46% as the rise was contained by ECB action. The central bank ensures that interest rates do not skyrocket. In the event of new elections, however, they could well rise again. The support of the ECB only seems certain if a stable government is in office that pursues economic policies that are accommodating to the central bank.
If a wasteful and Eurosceptic coalition comes to power, aid will no doubt be cut. However, Italy is no longer in the same situation as it was ten years ago. However, government debt is higher, making it more vulnerable to interest rate hikes. But its trade balance is almost balanced. Only because of the increased energy prices did it fall back into the red at the beginning of the year. Italy maintains a competitive and exporting industry. It is therefore less dependent on foreign financing than in 2012.
9. Couldn’t European funds be paid to Italy?
La Botte is the biggest beneficiary of Europe’s stimulus package, with 191 billion euros in grants and loans. About a quarter of this sum has already been paid to him. By 2026 it still has to receive around 145 billion euros. However, this presupposes that the country keeps its reform commitments. The next government has yet to endorse such reforms.
“The timing of the political crisis is unfortunate as it could delay the implementation of reforms and investments related to the European Recovery Plan funds and potentially hamper the disbursement of the next tranches of European Union loans,” said Nicola Nobile, Economist at Oxford Economics. There could therefore be a standoff between the European Commission and a possible future Italian government, such as a populist one.
10. Does his departure signal the weakening of the Western coalition against the Kremlin?
Mario Draghi’s departure is apparently good news for the Kremlin. He was one of the main leaders of the Western coalition against Russia and one of the least ambiguous.
His determination was demonstrated by shipments of heavy arms on a par with the Italian army’s resources – a commitment all the more remarkable given that Rome had close economic ties with Moscow, particularly with regard to gas supplies. However, his successor is unlikely to deviate from his line of solidarity with Kyiv, except perhaps if he comes from the far-right Fratelli d’Italia party.