Draghi’s Political Downfall: How Power Exploded in Italy and What Happens Next

Mario Draghi’s government ended earlier than many analysts expected.

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Mario Draghi is famous for saving the Euro. But the desired rescue of the Italian economy ended prematurely when domestic politics came to the fore last month, making it difficult for him to rule.

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

An Italian government official, who preferred to remain anonymous due to the country’s political instability and the sensitive nature of the comments, told CNBC that Draghi “was definitely a little tired of politics within the government.”

Draghi, who was managing director at Goldman Sachs International, 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 were desperate to see a pair of safe hands driving the eurozone’s third-largest economy.

The former European Central Bank chief presented on several fronts, including drawing up a reform plan to get more than 190 billion euros ($194.52 billion) from the European Union. However, the payments are tied to the completion of these reforms, so investors fear that the upcoming coalition may not follow through on Draghi’s plans, and therefore may not receive all the cash from Brussels.

The prime minister has also revived Covid-19 vaccination efforts and contributed to an economic recovery. But throughout his tenure, Draghi has had to grapple with a slew of political sensitivities.

what happened?

The collapse of his government came because of that fragility at the heart of the government. It started with the Five Star Movement (M5S), a left-leaning and populist party, which boycotted the vote on a deal aimed at helping Italians deal with the rising cost of living. The package included a controversial waste incinerator in Rome, against which the M5S rallied heavily.

The same anonymous source at CNBC said the M5S has “a big following in Rome, not so much in the rest of the country, but that law has been a problem for these voters.” By not voting on and blocking the broad package, the official said, the party was in essence against the government they were a part of.

Draghi submitted his resignation after the deadlock in the vote.

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

The official said Draghi was confident that this was a national unity government. But with the M5S abstaining from voting on the government bill,” Draghi felt [it] Implementation of his program is becoming more and more difficult.”

By the late evening of Wednesday, July 15, Italian President Sergio Mattarella had rejected Draghi’s initial resignation and asked him to build a new parliamentary consensus.

In the following days, hundreds of mayors signed a letter asking him to stay. Union leaders and industrialists are also coming together to ask the Draghi to stay in office. There was an online petition signed by thousands of citizens who wanted him to stay.

If they say yes, [Draghi] He has all the power he wants.

The following week, Draghi returned to the Italian Parliament and asked lawmakers for a new mandate. “Are the parties and parliamentarians ready to rebuild this agreement?” He declared in the Senate on July 20 that “Italy needs a government that can move quickly and efficiently,” he told lawmakers.

The first source told CNBC they were surprised Draghi asked for a new mandate to try to build the unit again. “To be honest, his speech was really tough against M5S and Lega [party] The source said… His goal was to clarify the matter: If we form another government, we have to continue without problems.”

If they say yes, [Draghi] He had all the power he wanted; If they say, he cannot resign without being blamed for leaving the country.”

The second source confirmed to CNBC that Draghi is “very concerned” about his ability 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 a lot at stake.

“If a right-wing coalition wins the Italian general election on September 25, and subsequently abandons economic reforms, it could jeopardize not only Italy’s access to financial support from the European Union and the European Central Bank’s new anti-fragmentation tool, but overall future EU integration. George Buckley, an economist at Nomura, said in a research note last week.

The upcoming elections will not only be important for knowing where Italy’s fiscal and fiscal strategy will go, but also whether Europe will continue to raise new money together.

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

However, if there are problems with the larger donor’s political standing, it could stifle more joint borrowing, including when addressing climate change or the impact of Russia’s invasion of Ukraine.

“It is unlikely that the incoming Italian government will put the country’s future in the eurozone in doubt, in a repeat of the turmoil we saw after the 2018 elections. But it will likely implement a looser fiscal policy and will find it more difficult to pass reforms,” said Jack Allen Reynolds, chief European economist at Capital Economics, in a note last week.

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