Italian Prime Minister Mario Draghi
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Italian Minister Mario Draghi is due to tell lawmakers on Wednesday whether or not he will stay on as prime minister – which could create further market volatility ahead of a crucial European Central Bank meeting later this week.
Political instability returned to Rome last week when one of the coalition parties decided to oppose a bill in parliament. The move prompted Draghi, who has been in power since February 2021, to announce he is stepping down.
However, Italian President Sergio Mattarella rejected Draghi’s resignation and asked him to hold further parliamentary talks.
Draghi is now due to speak to parliamentarians about the results of his talks on Wednesday morning, but it is unclear whether he will remain in power.
An official working for the Italian government, who did not want to be named because of the sensitivity of the subject, told CNBC that it is “more likely that he will confirm his resignation and we will go to the election, but we have to see if all these attempts to convince him to change his mind will be successful.”
Hundreds of mayors signed an open letter over the weekend asking Draghi to stay. Union leaders and industrialists also rallied to demand that Draghi remain in office. Meanwhile, thousands of citizens also signed an online petition asking Draghi to stay, according to the AP.
Matteo Renzi, leader of the Italia Viva political party and a former prime minister, told CNBC’s “Street Signs Europe” on Tuesday that his “personal bookmaker indicates that Draghi will retain his role, [by] 75%”.
He added that he would like Draghi to stay in power until May 2023, just before parliamentary elections.
Draghi has brought political stability to Italy over the past 15 months, which has been crucial in securing nearly 200 billion euros ($205 billion) in European pandemic recovery funds. His leadership was also important in the context of Russia’s invasion of Ukraine, with the former ECB chief playing a role in EU sanctions and supporting Italian households coping with higher consumer prices.
Italian bonds are likely to remain under pressure until we get clarity on the political front.
Frederic Ducrose
Head of Macroeconomic Research, Pictet Wealth Management
However, that stability could be about to end if Draghi leaves, as there is no clear majority in parliament for either political party if snap elections are held.
Political uncertainty is particularly problematic at a time when inflation continues to rise, Russian gas flows are falling and the ECB is looking to raise interest rates.
“Pressure to create the conditions to allow Draghi to stay in office is increasing, making it the most likely scenario,” Lorenzo Codogno, chief economist at Macro Advisors, said in a note on Monday.
Regardless of the outcome, markets will be watching closely.
The yield on 10-year Italian bonds traded 0.3 percentage points higher on Tuesday at 3.3960%. The same yield hit 3.394% on Friday after Draghi’s decision to resign.
Investors are concerned about Italy’s outlook as a result of recent political turmoil. At the beginning of the year, the yield on 10-year Italian bonds was below the 1% mark.
It’s not just the latest political picture that’s raising concerns. The European Central Bank has plans to raise interest rates, which could be a problem for Rome given the country’s extremely large public debt.
“Italian BTP is likely to remain under pressure until we get clarity on the policy front, which remains as fractured and uncertain as ever,” Frederic Ducrose, head of macroeconomic research at Pictet Wealth Management, said in a Friday note.
“Draghi may stay after winning another vote of confidence, but ultimately he will be out of the equation anyway,” he added.
Italy is due to return to the polls in June 2023, unless snap elections are held before then, and Draghi, a technocrat, is unlikely to run for office.
Given the volatility in Italy’s parliamentary chambers, investors say the volatility could be lifted if Draghi decides to stay a little longer, but will eventually return to Rome.
This is also important for Italy’s economic and financial future. On Thursday, the ECB is expected to unveil a new tool to tackle the risks of fragmentation in the eurozone. The idea is to calm markets that have been jittery over the 19-member region’s huge piles of public debt.
But Italy can only benefit from this new tool if it meets strict reform targets.
The ECB “is likely to unanimously agree that a necessary condition for a member state to receive ECB support will be for the government to comply with the European reform agenda,” Ducrose said.
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