Political chaos in Italy: Mario Draghi has submitted his resignation

LAST UPDATE 13:21

Italian Prime Minister Mario Draghi submitted his resignation to President Sergio Mattarella today, his office said in a statement, Reuters reported.

The resignation came after the collapse of the national unity government, setting the country on course for early elections and hitting financial markets.

Mattarella’s office said the head of state had “taken note” of the resignation and asked Draghi to remain in an official capacity.

Mattarella plans to meet with the presidents of both houses of parliament on Thursday afternoon. Political sources said earlier this week that he would likely dissolve parliament and call early elections in October.

The political crisis upended months of stability in Italy, during which Draghi had helped shape Europe’s tough response to Russia’s invasion of Ukraine and strengthened the country’s position in financial markets.

Draghi received a standing ovation from MPs when he made a brief appearance in the lower house of parliament today.

“Even central bankers touch their hearts sometimes,” he joked as he received applause.

Your resignation sparked a sell-off in Italian bonds and stocks as markets braced for the European Central Bank’s first rate hike since 2011.

The short-term yield on Italy’s 10-year government bond jumped more than 20 basis points to 3.7%, although the yield was well off the 4%-plus levels seen in June.

“This is a big blow to Italy’s ability to implement policies and reforms in the short term,” said Lorenzo Codogno, head of LC Macro Advisers and a former senior Italian finance ministry official. “There will be delays and disruptions with early elections and probably no budget until the end of the year.”

A bloc of conservative parties, led by Italy’s Brotherhood, looks likely to win a clear majority in the next election, an opinion poll showed this week.

The former head of the ECB tried to align his divided allies in the coalition, without success. Three of his coalition partners withdrew their support on Wednesday night after Draghi called for a vote of confidence, threatening to resign. And while Draghi did not resign immediately after the vote, the move effectively ended the unity government he had led since February 2021.

The left-wing Five Star Movement, one of the parties in the coalition government, had opposed a new decree aimed at reducing inflation and combating rising energy costs. Italy’s lawmakers held a confidence vote on the broad policy package, but Five Star boycotted the move, angering both Draghi and the right-wing coalition parties.

The former head of the European Central Bank was then called to return to the upper house of parliament on Wednesday to seek a vote of confidence. Before Wednesday’s drama, three of his governing allies, Giuseppe Conte’s populist Five Star Movement, Matteo Salvini’s nationalist Northern League and Mario Berlusconi’s centre-right Forza Italia abandoned him. Instead, the centre-right had proposed a new vote to keep the Five Star Movement out of the coalition.

The situation will be closely watched in Frankfurt where the ECB is set to unveil a new crisis-fighting tool designed to protect heavily indebted countries like Italy from speculation.

Economists at Bloomberg Economics say the uncertainty is likely to make bondholders more nervous, increasing pressure on the ECB to announce a credible anti-fragmentation tool on Thursday.

Italian bonds will come under strong pressure today, with FTSE MIB futures down 4% following the vote of confidence, and banking stocks will be in the spotlight.

Italians want stability

Hundreds of mayors signed an open letter over the weekend calling for Draghi to stay. Union leaders and industrialists also rallied to call on Draghi to stay in power. Meanwhile, thousands of citizens also signed an online petition asking Draghi to stay, according to the AP.

Technocrat leader Draghi had brought political stability to Italy over the past 15 months, which was critical for receiving nearly 200 billion euros in pandemic recovery funds.

His leadership has also been important in the context of Russia’s invasion of Ukraine, with Draghi playing a role in EU sanctions and supporting Italian households struggling with high inflation.