Italian Prime Minister Mario Draghi has resigned after failing to restore his coalition government

Italian Prime Minister Mario Draghi

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Prime Minister of Italy Mario Draghi He is expected to resign on Thursday, paving the way for fresh elections and opening a new chapter of political uncertainty.

Speaking in parliament, Draghi said he would meet with President Sergio Mattarella to convey his intentions after his fragile coalition failed to put together a government.

“Thank you for all the work we’ve done together over this period. After last night’s vote in the Senate, I’d like to adjourn this session because I’m going to contact the president about his intentions,” Draghi told lawmakers, a spokeswoman said.

It comes after Draghi was snubbed by his coalition partners in a confidence vote in the Senate on Wednesday, meaning the government collapsed.

Even if it could win the referendum, one of the parties in the coalition government, the left-leaning Five Star Movement, said it would not participate. The ruling Lega and Forza Italia parties have said they will not participate.

This paves the way for difficult and uncertain snap elections that could happen in September or October.

Last week, Mattarella Rejected Draghi’s first resignation He asked for further talks with lawmakers, hoping to avoid snap elections.

It came after the Five Star Movement opposed a new mandate to curb inflation and fight rising energy costs. Italy’s lawmakers held a confidence vote on the broad policy package, but Five Star boycotted the measure, angering both Draghi and the right-wing parties in the coalition.

Draghi, Ex European Central Bank The president then asked Mattarella to go back to the upper house of parliament and hold a vote of confidence in the government on Wednesday, meaning Italian politics have been in limbo for the past week.

Yields will rise

Italian bonds rose on Thursday on expectations that Draghi would resign. The yield on the 10-year government bond rose to 3.6350% at 10 a.m. local time; It was 1% at the beginning of the year.

Additionally, equity markets were lower on Thursday’s news. Italy’s main code, the FTSE MIBIt traded almost 2% lower in early European trade.

Investors have several reasons to be concerned about Italy. First and foremost, opinion polls point to a fragmented parliament, meaning fresh elections could lead to tough coalition talks.

At the same time, Italy has one of the highest debt piles in Europe, faces record inflation and its growth prospects are limited. This macroeconomic environment becomes particularly challenging as the European Central Bank prepares to raise interest rates, which could hamper Italy’s economic performance going forward.

“Judging by some long-term fundamentals, Italy is slowly turning into a disaster,” Holger Schmiding, Berenberg’s chief economist, said in a note on Thursday.

He cited three main problems: low growth trend, poor demographics and interest in political drama.

“For now, we have to brace ourselves for disruptive noise, but not a real euro crisis 2.0 in our view,” he added.

Stability months

Hundreds of mayors signed an open letter over the weekend asking Draghi to stay. Union leaders and businessmen also rallied to urge Draghi to stay in office. Meanwhile, AP reports that thousands of citizens have signed an online petition asking Draghi to stay.

Technocrat leader Draghi has spent the past 15 months bringing political stability to Italy, which has been key to securing nearly 200 billion euros ($205 billion) in pandemic recovery funds.

His leadership was key in the wake of Russia’s invasion of Ukraine, Draghi played a role in EU sanctions and supported Italian households dealing with high consumer prices.

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