Mario Draghi, Italy’s Prime Minister, has resigned today, after key coalition parties withdrew their support for his government. His resignation opens the way for early elections in September or October and starts a period of political uncertainty in Italy. Draghi had offered his resignation last week, and it was rejected by the president, Sergio Mattarella, who asked him to address parliament in order to avoid the third parliament in three years.
This situation has created a scenario of political uncertainty, in a moment where levels of inflation in the Euro area are high and the potential for growth in Italy might be now put at risk.
For the experts at Amundi, this political uncertainty may also put at risk for the Italian government to meet the 55 targets and milestones for the recovery plan, which Italy would have to meet in order to receive the €19bn from the European recovery plan in early 2023. In their opinion, reforms already discussed could, however, be within reach of a caretaker government in order to avoid any delay in the 2023 NGEU disbursement. As the financial experts say, delays would negatively impact both potential growth and the short term investment boost which was expected to support growth to just above potential between 2023-2026.
Annalisa Piazza, Interest rates strategist at MFS describes yesterday, the day when all the parties met as surreal, as both populist parties La Liga and Five Star Movement, made some tactical movements to regain some of their lost popularity, and they decided to abstain at the confidence vote.
As the analyst says, this is possibly the worst outcome of the crisis that started last week, and in her opinion more fragmentation is expected to emerge. It might result on the President Mattarella deciding to dissolve the Parliament as early as next week after consultations with the Presidents of both Chambers. This political outcome, might add further confusion to the ECB anti-fragmentation tool that is clearly not aimed at reducing political risk, and so the ECB will be in a very uncomfortable situation when the downside risks for Italy’s growth will spill over into other Eurozone economies.
In her opinion, it is likely to see BTPs/Bund spreads to suffer some widening trend in the coming weeks, and says that MFS rules out spread to reach levels seen during the Global Financial Crisis or in 2018-19 when existential issues of the Eurozone were discussed but it is certain that additional uncertainties will be priced in.
In Paul Diggle’s opinion, who is the Deputy Chief Economist, Forecasting & Analysis at abrdn the Italian government has collapsed and there are two main options or a caretaker government until the scheduled elections in spring 2023 where parties would have to make many compromises to stitch together a majority or the more likely option of snapping elections, probably in early October.
As the deputy Chief Economist says, the current polling suggests that a coalition of the right (Fratelli d’Italia, Lega, and Forza Italia) is most likely. However, early elections would delay the budget and disbursement of the Recovery Fund, adding uncertainty to an already challenging economic outlook.
Also commenting on the news, Filippo Alloatti, Head of Financials at Federated Hermes Limited said that the resignation of Mario Draghi as Italian Prime Minister marked the end of a well-assorted government, which had run the country rather well during the pandemic.
He continues saying that It was important for Draghi to maintain his credibility by sticking to a reformist agenda and not to be perceived as someone horse trading with other political parties.
In his opinion, with the prospect of a colder winter and a possible recession, the room manoeuvre for any coalition winning the election will be limited, and any major deviations from the Draghi agenda will be unlikely.