DThe financial markets are likely to react to the events in Italy on Thursday. Mario Draghi’s resignation as Italian Prime Minister is considered likely this Thursday. “Addio al governo Draghi” (“Farewell to the Draghi government”) was the headline in Corriere della Sera, “Italy tradita” (“Italy betrayed”) was the title of La Repubblica on page one.
On Wednesday, the prime minister was unable to convince the parliamentarians in the second chamber, the Senate, of his program and his continued leadership as head of government. Most MPs from the Five Star Left Party, but also from the right-of-centre parties, i.e. the Lega and the Berlusconi party Forza Italia, refused to support him in the vote of confidence.
The unprecedented outpouring of civil society support that Draghi received has passed Parliament by. Italy is now opening “a black page” and “politics have failed,” Italian Foreign Minister Luigi Di Maio wrote on Twitter, because it was irresponsible to withdraw confidence from the successfully working government in the current crisis. “The perfect storm is now threatening,” said Italian EU Commissioner Paolo Gentiloni.
A clear answer
The now expected resignation of the government will probably lead to new elections in September or October and thus to a longer period of uncertainty. This is the outcome that markets fear. Share prices on the Milan stock exchange fell by 1.6 percent on Wednesday, significantly more than on other European stock exchanges. Italy’s 10-year government bonds yielded 3.5 percent higher than those of Greece. Investors are thus assuming higher risks for Italy than for the country that was on the brink of financial collapse just a few years ago.
The interest rate difference (“spread”) between the ten-year bonds of Germany and Italy rose to almost 240 points at times, but then fell significantly again. Some market participants believe that the European Central Bank (ECB) is an active buyer, but this has not been confirmed. The central bank wants to counteract sharply diverging interest rates in the euro area because, according to its fears, monetary policy will then no longer work. Today, Thursday, the Governing Council of the ECB is discussing new measures against surging interest rates. The government crisis in Italy amplifies the dilemma because, according to its statutes, the bank may not become a political player, but its interventions can have a political character.
Draghi had announced further economic reforms in the Senate and the completion of measures that had already been started. But he also promised accompanying social measures, such as a nationwide minimum wage. He proposed a new “confidence pact” to the parliamentarians. “Are you ready to acknowledge the effort you made in the first few months that has since faded?” he asked. MEPs gave a clear answer on Wednesday evening: no.
