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Mario Draghi struggles through mire of Italy’s turbulent politics

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Italians and international investors alike were euphoric when Mario Draghi, the former European Central Bank president credited with saving the euro, was summoned to lead the country during the depths of the Covid-19 pandemic.

But this week, Italy’s turbulent politics resurfaced as a disgruntled party in Draghi’s unity government boycotted a key parliamentary vote. The prime minister, to whom parties had pledged their loyalty in February last year, offered his resignation. Though he still commands a majority in parliament, Draghi said the conditions were no longer in place for him to proceed with an ambitious reform programme on which the flow of EU Covid recovery funds worth hundreds of billions of euros depends.

President Sergio Mattarella has rejected Draghi’s resignation and asked him to return to parliament next week. But Italians face days of uncertainty as they wait anxiously to see whether Draghi has the will to stay on — and the crumbling government can be shored up until the end of its term next spring — or whether Italy now tumbles into early elections.

As multiple challenges loom for the country — many of them caused by Russia’s invasion of Ukraine — businesses, investors and Draghi’s European allies are keen for him to soldier on.

“Italian businesses and families are living through a profoundly complex period due to the effects of the war in Ukraine, the energy crisis, inflation and a dangerous rise in Italian bond spreads,” said Carlo Bonomi, president of Confindustria, the national industry association. “Draghi’s international credibility is the only possible response to the challenges ahead.”

As cracks in the coalition government have widened in recent weeks, the high hopes for what Draghi can do for Italy have faded.

“It would be extremely difficult to deliver further reforms before the next elections,” said Lorenzo Codogno, former director-general of Italy’s Treasury. “If you have an emergency and elections are in the distant future, parties are more willing to compromise. As elections approach, this situation becomes more and more difficult.”

Codogno said Draghi now “prefers to step down and go for early elections”, likely believing such a move to be in Italy’s best interests. “If you wait, it would be a wasted year because nobody would be able to do anything,” he added.

But Lucrezia Reichlin, a professor of economics at London Business School, said, “there still a possibility that the Draghi government will survive — it’s not over. In Italy, traditionally, creative solutions have always been found.”

Protests in front of the Chigi Palace government offices in Rome this week
Taxi drivers protest in front of the Chigi Palace government offices in Rome this week © Mauro Scrobogna /LaPresse/AP

In his first year as prime minister, Draghi oversaw growth in gross domestic product of 6.6 per cent, an impressive rebound from a brutal 9 per cent contraction in 2020. He helped fix a faltering vaccination programme and won an EU commitment for up to €200bn in Covid recovery funds if Italy undertook reforms. He was also popular among ordinary Italians, many of whom felt optimistic about their country’s prospects for the first time after decades of gloom.

But the Ukraine conflict put new pressures on Italy’s economy and on the unwieldy governing coalition, whose biggest constituents were the anti-establishment Five Star Movement, Matteo Salvini’s rightwing League and the centre-left Democratic party.

Rising food and energy prices strained household budgets, and prompted the imposition of a tax on energy companies “windfall profits” to finance support for vulnerable families and small businesses without an increase in public borrowing.

Draghi also took a tough stand against Russia. Both Five Star and the League — which had historic ties with President Vladimir Putin — squirmed, urging Draghi to do more to foster compromise between Kyiv and Moscow.

Matteo Salvini, leader of the far-right League, seated in the Italian Senate
Matteo Salvini, leader of the far-right League, seated in the Italian Senate © Andreas Solaro/AFP/Getty Images

Tensions within Five Star over Ukraine led to a party split late last month, with foreign minister Luigi Di Maio leading a walkout in protest at party leader Giuseppe Conte’s continuous sniping at Draghi’s foreign policy.

Negotiations on reforms with coalition members had already proved painful. Plans to update property values in official land registries — to improve property tax collection — were stalled for months by Salvini. So too were plans to auction lucrative beach concessions, a point of friction between Rome and Brussels.

But the Five Star split prompted a wounded Conte to grow more combative in his demands, especially in his call to scrap a contentious waste-to-energy plant planned for Rome by another coalition partner, the Democratic party.

While Five Star boycotted a vote this week on an economic aid bill that included approval of the plant, Salvini expressed support for a disruptive taxi driver strike against a new competition law, which was required for Italy to receive its next tranche of Covid funds.

By offering his resignation, many analysts believe Draghi has strengthened his hand against the coalition parties, many of whose members dread the prospect of an early poll given their poor chances of re-election to a parliament that is being reduced in size.

“Draghi’s being clever,” said Daniele Albertazzi, a politics professor at the UK’s University of Surrey. “It looks like just political theatre, but there is something underneath. Draghi has established his authority. He is going to go back to parliament, and say: ‘Who is with me?’”

Francesco Galietti, founder of Policy Sonar, a Rome political risk consultancy, said the premier “has made clear that he doesn’t want to waste his time with petty games. He says, ‘I am Mario Draghi. You want to play your games? Not with me.’”

Even if early elections prove imminent, Luigi Scazzieri, a senior fellow at the Centre for European Reform, said Draghi has left Italy a substantial legacy in the EU Covid recovery programme architecture, which ties the delivery of the next tranches of funds to progress on reforms.

“Future governments would have a strong incentive to keep going with reforms,” he said.

With the spread between Italian and German bonds hitting their highest level for a month on Friday, Scazzieri said Italy — and its economy — would benefit from Draghi’s continued presence a little longer.

“Draghi remaining in charge throughout this period would provide stability to see Italy through the darkest period in the tunnel,” he said.

Additional reporting by Silvia Sciorelli Borelli in Milan

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