Mario Draghi’s exit is bad news for Italy and the euro, LJucca explains:
An Italian flag flutters in front of Piazza Navona, as Italians remain under lockdown to prevent the spread of the coronavirus disease , in Rome, Italy, April 4, 2020.MILAN, July 14 - Italy’s latest political crisis comes at a dreadful time. Prime Minister Mario Draghi, formerly at the helm of the European Central Bank, offered on Thursdayto resign after losing the support of a key ally in his national unity government.
Draghi became premier in February 2020 to address the pandemic emergency. His decision to quit follows an open clash with the anti-establishment 5-Star Movement, which failed to back his plan to combat the rising cost of living. Italian President Sergio Mattarella, who has the power to dissolve Parliament, rejected Draghi’s resignation, urging him instead to assess next week if a new majority could be formed.
A new government with Draghi at the helm remains possible, and desirable. Italy faces the threat of having to ration energy this winter if Russia does not resume its regular export of gas, a move that would surely trigger a recession. Keeping the experienced economist in charge at such a critical juncture would reassure investors that Italy’s already large sovereign debt, 151% of GDP, would not spiral out of control.
Despite much pressure from Mattarella, forming a new majority in any case looks tough. Hard-right parties Brothers of Italy and the League may jump at the opportunity to push for early elections in September, given opinion polls indicate they will jointly win. Both political forces have criticised the European Union and even suggested quitting the single currency. While their leaders have recently toned down their anti-euro rhetoric, investors would remain wary.
Without cover from Draghi Italy’s debt, already under pressure from rising yields, risks getting harder to finance. The ECB would struggle to justify trying to soothe turmoil caused by domestic political squabbles. That won't help an already weakening euro
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