Italy's Prime Minister Mario Draghi made a bold move as a central banker, saying "I will do whatever I need to do" to protect the euro currency when I was the governor of the European Central Bank (ECB). I put it on. However, now that he has become prime minister, "bluffing" it backfired. Draghi sought to gain widespread support for reform from the ruling coalition in a cabinet confidence vote held by the Senate on the 20th. However, the boycott of the votes by the three major political parties has increased the possibility of a general election ahead of schedule, leaving Italy in a dangerous situation with uncertain future prospects.


Draghi took office as Prime Minister in 2021, leading the response to the pandemic of the new coronavirus and pushing for reforms to secure the European Union (EU) pandemic reconstruction fund. But as the general elections scheduled for next year approached, some of the supporters emerged in politics. The confidence vote emphasized the need for further reforms in areas such as tax and legal systems. As a result, the Dragi Cabinet received a majority vote in the confidence vote, but major political parties that make up the coalition government, such as the right-wing "Alliance" and the left-wing "Five Star Movement," withdrew from the vote.


It is not inevitable that the general election will be advanced. But it will be difficult for Draghi to pursue his policy agenda. When a general election is held, it is most likely that a right-wing coalition government will be born under the leadership of the far-right party "Brothers of Italy," which is skeptical of the EU. That would make it difficult to convince other EU member states that Draghi's reforms could be taken over and Italy could curb public debt by around 150% of gross domestic product (GDP).


The timing of the political crisis is also bad. Italy, which imports large amounts of energy, could be hit by 5% of its GDP if Russia's President Vladimir Putin stops supplying natural gas to Europe, according to estimates by the International Monetary Fund (IMF).


Italy, which has lost its steering role, may find it more difficult to drive reforms and comply with EU fiscal rules. This would make it difficult for ECB Governor Christine Lagarde to include Italy in new bond-buying plans to curb the borrowing costs of vulnerable member states in raising rates. Italy, which lacks a reforming government, may eventually be disqualified from spending € 672 billion on the Corona Reconstruction Fund.


The turmoil of the 2012 debt crisis, which has driven Draghi into a promise to buy bonds, is not inevitable. Yields on Italian government bonds soared on the 20th, but 10-year bonds were around 3.5%, only half of the 2011 peak. Domestic banks are well-capitalized and will not aim to leave the eurozone at this point, even if a skeptical government emerges in the EU.


But Italy will face slow growth, sluggish investment, and rising borrowing costs until it can establish a credible reform-oriented government. It's just my own business.


Background news


* The confidence vote of the Draghi Cabinet held by the Italian Parliament Senate on the 20th was passed by a majority. However, three major coalition parties, the right-wing "Alliance" and "Forza Italia," and the left-wing "Five Star Movement," boycotted the vote. There is a possibility that the general election will be held ahead of schedule, triggered by this move.


* Mr. Draghi took office as Prime Minister in 2021 and has demonstrated leadership in responding to the pandemic of the new coronavirus and acquiring the EU reconstruction fund.


* Yields on Italian 10-year government bonds were 3.20% early on the 20th but rose to 3.61% after the confidence vote.