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ITALIAN POLITICS

Four scenarios: What happens next in Italy’s government crisis?

With Italy's government on shaky ground after Draghi's attempted resignation, what does this mean for the country, and what happens next?

Italy's Prime Minister, Mario Draghi addressing the Senate on June 21st, 2022.
Italy's Senate on June 21st, 2022. Photo by Filippo MONTEFORTE / AFP

Italy was thrown into turmoil on Thursday after the populist Five Star Movement (M5S), which had been the largest party in parliament, abstained from participating in a crucial vote in the Italian senate.

M5S’s decision to boycott the vote on a €23 billion aid bill designed to offset the soaring cost of living for Italians was seen as a fatal blow to the integrity of the coalition government.

Draghi resigned on Thursday evening, saying the “pact of trust that the government is based on has gone”. He had been appointed as a technocratic prime minister in February 2021 after a previous government collapse.

Italy’s head of state President Sergio Mattarella refused to accept the prime minister’s resignation, however, and pressed Draghi to reconsider.

READ ALSO: LATEST: Italy’s president refuses to accept PM Draghi’s resignation

Draghi will now leave on a scheduled state visit to Algeria to negotiate a gas deal, but has agreed to return to parliament on Wednesday at Mattarella’s request to see whether a resolution can be reached.

What does this all mean for Italy? At this stage things could go any number of ways; we take a look at some possible scenarios put forward by Italian media and political and financial analysts.

A snap election

Italy was due hold a general election anyway in the first half of 2023; a snap election would bring this forward by several months.

M5S is expected to do poorly in a snap election, having haemorrhaged support since they were voted in as the largest party in 2018 – which is why some analysts have suggested M5S doesn’t actually want the government to collapse at all, but to shore up support from voters by proving its anti-establishment credentials.

READ ALSO: Anger and astonishment in Italy after PM Draghi’s resignation attempt

In favour of a snap election is the far-right Brothers of Italy party, which performed well in local elections in June. Salvini, leader of the hard-right populist League party, has also expressed support for the idea.

That’s unsurprising given that the most probable outcome from an early election is a right wing coalition government led by Brothers of Italy, League, and Silvio Berlusconi’s Forza d’Italia.

Draghi reaches an agreement with M5S and things go on as before

This seems an unlikely prospect as both Draghi and M5S leader Conte have insisted on their determination not to bend to the other’s will.

The M5S boycott came after Conte presented Draghi with a nine-point list of demands, including the introduction of an Italian a minimum wage, which the prime minister rejected. Conte has accused the government of bringing about the current crisis by using “force and blackmail”.

Draghi, for his part, has simply said he won’t give in to ultimatums issued by parties in his ‘unity’ government.

Even if Draghi and M5S were to reach an agreement, the government would be fragile, and there’s nothing to say there wouldn’t be another crisis in a few weeks’ time.

Draghi forms a new majority without M5S

In theory this is technically viable, and appears to be what Mattarella has in mind. Even without M5S, Draghi could still get the votes to form a majority in parliament.

It’s questionable whether this could actually work in the long run, however, with newspaper Corriere della Sera calling it “a possibility that hardly anyone believes in.” It would require the League to lend its support and risk alienating the Brothers of Italy, which wants an immediate election.

Draghi is reportedly possessed of the “intimate certainty” (his own words, according to Corriere) that if he does form a new government, he’ll be subjected to attacks of the same kind from other parties like the League in the following weeks and months, and the government will collapse all over again.

Draghi leaves and a new government is formed without him

In this scenario the favourite to become prime minister is Daniele Franco, the current finance minister who, like Draghi, has no party affiliation.

His would be another technocratic government made up mostly of the same ministers as those in the current cabinet, minus M5S leaders.

A Franco government would steer Italy through the passage of a budget law in the autumn and the possible enactment of an electoral law currently under review, and see the country through to a general election towards the start of next year. 

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ITALIAN POLITICS

What does Italy’s latest political crisis mean for the economy?

The potential collapse of Italy's government has thrown the post-pandemic recovery plan into doubt and brought back fears of a debt crisis - but how severe will the impact on the economy really be?

What does Italy's latest political crisis mean for the economy?

As Italy was plunged into a political crisis on Thursday, shockwaves immediately rippled through the markets: Milan’s stock exchange was down more than three percent over fears Prime Minister Mario Draghi’s coalition government could come crashing down and spark snap elections.

All eyes are now on borrowing costs after the ‘spread’ – the closely watched gap between German and Italian 10-year interest rates – widened further on Friday following Draghi’s attempted resignation amid the deepening crisis.

READ ALSO: Four scenarios: What happens next in Italy’s government crisis?

But President Sergio Mattarella refused to accept the prime minister’s resignation – instead urging Draghi to address parliament on Wednesday in an attempt to find a way forward.

The country now faces prolonged uncertainty, with no clear path forward.

“Any signal that Draghi would not survive the 2023 parliamentary elections, or even leave office before, is a cause for concern for the markets,” Gilles Moec, chief economist at the Axa group, told AFP.

Although political crises are nothing new in Italy, Galietti said “this one is unprecedented” because of geopolitical factors, citing tensions with Russia over its invasion of Ukraine.

Even without the current political instability, Italy’s economic outlook is suffering due to “the size of its debt, its low growth rate and its strong dependence on Russian gas,” Moec said.

Italy's Prime Minister Mario Draghi tried to tender his resignation on Thursday, but was asked by President Sergio Mattarella to stay.

Italy’s Prime Minister Mario Draghi tried to tender his resignation on Thursday, but was asked by President Sergio Mattarella to stay. Photo by Filippo MONTEFORTE / AFP.

Italy has a mammoth debt of over 2.7 trillion euros or some 150 percent of GDP – the highest in the eurozone after Greece – though the debt-GDP ratio is beginning to shrink.

The country has long lagged behind others in the eurozone: between 1999 and 2019, the economy grew by just 7.9 percent compared to 30.2 percent in Germany, 32.4 percent in France and 43.6 percent in Spain.

Italy’s gross domestic product increased 6.6 by percent in 2021, after a 2020 slump due to the coronavirus pandemic.

The Bank of Italy expects GDP to increase by 3.2 percent in 2022 – but that figure could drop below one percent if Russian gas supplies are cut off over the war in Ukraine.

READ ALSO: Italian PM says Russia’s excuses for gas cut are ‘lies’ as shortfall continues

After former European Central Bank chief “Super Mario” became prime minister back in February 2021, Italy’s 10-year borrowing rate fell below 0.5 percent.

It has now climbed to 3.4 percent.

Italy is counting on the European recovery fund to boost growth. It’s the biggest beneficiary of all member states, set to receive 191.5 billion euros if it ticks off a series of EU-requested reforms aimed at, among other things, improving creaking infrastructure and preventing large-scale tax evasion.

Draghi’s departure, however, would put those reforms at risk.

More than a thousand Italian mayors signed a petition on Sunday pleading with Draghi to stay on, saying the post-pandemic recovery plan required stability.

“Our cities… cannot afford a crisis today that means immobilism and division,” the petition said.

“We need stability, certainty and consistency in order to continue the transformation of our cities… Because without the rebirth of these, Italy will not be reborn either.”

But with Draghi’s grand coalition in disarray, the chances the country will head to snap elections after the summer are high.

READ ALSO: ‘We need stability’: Hundreds of Italian mayors plead with Draghi to stay

A far-right or populist win at the polls would weigh significantly on the spread, just as it did in 2018, when Matteo Salvini’s anti-immigrant League joined forces with the once anti-establishment Five Star Movement.

Public finances are however unlikely to be derailed as in the 2012 crisis, economic experts said.

“Interest rates would have to rise very sharply and durably for us to begin to observe solvency problems,” Natixis economist Jesus Castillo told AFP.

Italy’s bonds last on average over seven years, which means the rise in rates will not immediately be reflected in debt.

What’s more, banks are in better shape now than in 2012.

“Economic fundamentals remain compatible with long-term debt sustainability,” Castillo said.

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