Draghi’s political downfall: How power imploded in Italy and what happens next – CNBC

The government of Mario Draghi came to an end earlier than what many analysts expected.

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Mario Draghi is best known for saving the euro. But a coveted rescue of the Italian economy ended prematurely when internal politics came to the fore last month, making it harder and harder for him to govern.

In the space of about a week, Italy went from having a 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 has investors questioning Italy’s economic future and its broader role within European politics.

Draghi “was certainly a little bit tired of the 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 a managing director at Goldman Sachs International, Draghi became Italian prime minister in February 2021 to lead a technocratic government, backed by four main parties across the political spectrum. His arrival in Rome was welcomed by investors and European officials, who were desperate to see a safe pair of hands leading the euro zone’s third-largest economy.

The former European Central Bank chief delivered on several fronts, including putting together a reform plan to get more than 190 billion euros ($194.52 billion) from the EU. The disbursements are, however, linked to the completion of these reforms, so investors fear the next coalition might not follow through with Draghi’s plans, and hence may not receive all of the cash from Brussels.

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

What happened?

The collapse of his government came about because of those fragilities at the heart of government. It started with the Five Star Movement (M5S), a left-leaning and populist party, boycotting a vote on a package aimed at helping Italians deal with the surging cost of living. The package included a controversial waste incinerator for Rome, which M5S vehemently rallied against.

The same anonymous CNBC source said M5S has a “great following 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 wide-ranging package and blocking it, the party was in essence against the government that they were part of, the official said.

Draghi offered his resignation after the stalemate on the vote.

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

Draghi had “trusted this was a national unity government,” the official said. But with M5S abstaining from the vote on the government’s bill, “Draghi felt [it] was becoming harder and harder to enact his program,” the official added.

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

In the following days, hundreds of mayors had signed a letter asking him to stay. Union leaders and industrialists also come together 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] had all the power he wanted.

CNBC Source

The next 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 declared in the Senate on July 20. “Italy needs a government that can move swiftly and efficiently,” he told lawmakers.

The first CNBC source said they were surprised that Draghi asked for a new mandate to try to build unity once again. “To be honest, his speech was really tough against M5S and the Lega [party] … his aim was to put it clear: if we do another government, we have to continue without problems,” the source said.

“If they said yes, [Draghi] 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 concerned” about being able to pass new laws in Parliament. Draghi was due to finish his mandate 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 were to win in Italy’s general election on 25 September, and subsequently abandon economic reforms, it could jeopardise not only Italy’s access to EU fiscal support and the ECB’s new anti-fragmentation tool, but more generally future EU integration and joint debt issuance,” George Buckley, an economist at Nomura, said in a research note last week.

The upcoming election will matter not only to see where Italy’s finances and fiscal strategy will be heading, but also whether Europe will continue to raise new funds together.

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

However, if there are problems with the political situation of the biggest benefactor, then this could stifle more joint borrowing further down the line, including when tackling climate change or the impact from Russia’s invasion of Ukraine.

“Italy’s next government is unlikely to bring the country’s future in the euro-zone into doubt, in a repeat of the turmoil that we saw after the 2018 election. But it will probably run looser fiscal policy and find it more difficult to pass reforms,” Jack Allen-Reynolds, senior Europe economist at Capital Economics, said in a note last week.

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Draghi’s political downfall: How power imploded in Italy and what happens next – CNBC

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