Draghi: Remain or Leave
Thoughts on the Italian Political Crisis
Following his term as ECB President (2011-2019), Mario Draghi became Prime Minister of the current coalition of parties in Italy. He assumed this role in February 2021, however just a few days ago on Thursday 14 July 2022, Draghi offered his letter of resignation as Prime Minister.
The majority of national unity that had supported this government since its creation is no longer there
These were the words of Draghi in his resignation statement, however further complications follow Italy as President Sergio Mattarella declined this resignation. Draghi said he would not lead a coalition if all members were not satisfied.
Why did Draghi Offer to Resign?
One of the members of the coalition party in Italy is the 5-Star Movement, led by Giuseppe Conte. On the Thursday, in a vote to pass a €26bn package to shield inflation pressures for citizens, the 5-Star Movement party boycotted the vote, stating the current government was not doing enough to help Italian families struggling with energy costs and higher cost of living.
Draghi is not content with leading a government which does not have his full backing, hence the resignation.
He is set to speak in front of parliament on Wednesday 20 July 2022 in order to see how much support he has in the government, which will decide whether he continues or resigns, as instructed by Mattarella.
What does this mean for Italy?
A country already suffering under the burden of high energy costs, inflationary pressure, mounting debt amongst other factors does not need political turmoil to escalate and to be at the top of this list.
However, it seems that is exactly what has happened.
With no clear political leader at the moment the country is seeing a state of crisis and panic. It is a crucial time for all countries, but especially EU countries, in the face of mounting fears of Russian gas curtailment and the pressures building due to that. Italy especially is prone to these risks, and so needs a stable government to pass any packages proposed by the Eurozone. It needs stability now to ensure it can manage when the effects of inflation and higher interest rates will hit citizens the worst, likely towards the end of the year due to lags in the business cycles.
The anti-fragmentation package from the ECB is being planned and so there needs to be a leader to allow Italy to benefit from it. Risks to the Italian economy if there is no political leader will be detrimental.
How did Investors React?
The instability was reflected in Italian 10-year bond yields, which rose 0.11% to 3.24%. The spread between Italian 'BTP' and German 'Bund' yields (both 10-year Government bonds) is the most common gauge of Eurozone risk and sentiment. With German bonds seen as a 'safe haven' within the Eurozone, and German risk generally viewed as safe on one side, and Italian risk which is generally more affected during periods of crises on the other, it measures the level of confidence not only in these two markets, but the Eurozone as a whole.
On announcement of Draghi's resignation, the yield of Italian bonds rose, and so the spread between these two 10-year bonds widened to a 1-month high (on Friday morning) of 2.19% points. Investors want higher yields for holding Italian risks, and so Italian yields are generally higher than German yields. Therefore a rise in the Italian yields widened the spread.
Concluding Thoughts
Talks of an early election are still up for debate, however should this happen short-term risks are likely to be much higher than right now. At this time, what Italy needs is no fears of political turmoil: it needs Draghi to stay and pass-through the current global crisis.
Draghi was asked to be Prime Minister over a year ago - this says something about his track record in guiding the ECB (no less) through some of its most difficult times. An experienced individual such as Draghi himself is what Italy needs right now. The elections are set for early 2023, and so holding off until then would be the best call for Italy's stability.