Should Europe once again prepare to move forward without its Italian “leg”? The window of opportunity opened a year and a half ago with the arrival at the head of the government of a unifying, reassuring Mario Draghi, capable of reconnecting a country with the community adventure, has just closed, with his resignation .
In the European networks as on the markets, the departure of the former boss of the European Central Bank (ECB) creates a shock. Social Democrat MEP Elisabetta Gualmini can’t believe it. “Everywhere in the circles I frequent in Brussels, it was the same comment: with Draghi, the country is in good hands. The loss of the most famous leader outside Italy is akin to true political suicide,” indignantly this professor of political science at the University of Bologna, president of the Carlo-Cattaneo Institute.
“Time of uncertainty”
In Brussels, Paris or Berlin, no one wants to return to the “populism” box embodied in 2018-2019 by Matteo Salvini, xenophobic nationalist deputy prime minister, resolutely against the euro, openly hostile towards the institutions of Brussels. The Élysée retains a particularly bitter memory of this period made up of passes of arms. The prospect of early elections in the fall is worrying. For the French Secretary of State in charge of Europe, Laurence Boone, with the departure of Draghi, it is a “pillar for Europe” which collapses, opening a “period of uncertainty”.
Before the arrival of Mario Draghi at the head of the government, the Europeans had to take it upon themselves, wait for the storm to pass and show solidarity with an Italy brutally hit by the Covid-19 pandemic. Rome was the first beneficiary of the 750 billion euro recovery plan, opening the door, for the first time in history, to a debt at 27. It has paid off: levels of confidence in the EU have rebounded on the rise among Italians. And the momentum now broken by political strategies survives in public opinion: two thirds of Italians would have liked “Super Mario” to remain at the helm. The markets, they saw no mitigating circumstances: the Milan Stock Exchange fell by more than 1% on the announcement of his departure. Everyone is holding their breath to find out if the shock wave will have any implications for the single currency.
Under the specter of speculation
Should we now fear a “Greek-style” scenario, with speculative attacks against Italy… and against all the Member States of the euro zone? For several weeks, the markets have been betting on the Italian risk, considering Europe’s third-largest economy to be the new weak link in the euro zone. In the space of six months, the rate of ten-year Italian bonds rose from 1.3 to 3.5%, with the consequence of increasing the cost of public debt. This has already reached 150% of GDP, ie double the average in the euro zone.
With the departure of “Super Mario”, the risk is to see borrowing rates continue to soar. In 2018, when the Salvini government came to power, ten-year rates rose from 2% to 3.5% in a matter of weeks.
Stronger guardrails
Economists, however, distinguish the current situation from that which prevailed in the early 2010s. Already because Italian rates remain below what they were at the time (Greek rates had risen to 22.5% in 2012). Then, because the Italian situation, despite growth tending to be weaker than in the rest of the EU, has improved since 2010, with a current account surplus now. Finally, because the banking sector is much stronger than it was then. “The two largest Italian banks are in very good health, while the banking sector of the other countries of southern Europe is sustainably cleaned up. It is difficult to see, under these conditions, a sovereign debt crisis combined with a banking crisis, as in 2012”, believes Christopher Dembik, economist at Saxo Bank.
Nevertheless: seen from Brussels, the political crisis in Italy accentuates the uncertainties about the continuity of the reforms undertaken to clean up the country’s public finances. However, without reform, the 191 billion euros promised to Italy as part of the European recovery plan would be suspended, which again risks weighing heavily on growth, and therefore on the country’s revenues. At this stage, Rome has only received a quarter of the recovery plan envelope.
Against the break-up of the euro zone
What singularly complicate the task of the ECB, which announced, Thursday, July 21, an increase in its key rates of 50 basis points, stronger than expected. Faced with galloping inflation in the euro zone, the Frankfurt institute finally decided to strike hard, at the risk of further aggravating the Italian situation, by widening rate differentials within the zone (the famous spreads scrutinized by the markets).
To limit these spreads and avoid a new crisis, the ECB has drawn the outlines of its new “anti-fragmentation” tool, intended to protect the most fragile States by making the purchase of their debt potentially unlimited. The mechanism will, however, come with strings attached, including assurances from governments to pursue « policies sound and sustainable fiscal and macroeconomic policies”. It remains to be seen whether the future Italian government will comply with such demands…
The foreign policy unknown
The economic environment will therefore remain inextricably linked to the geopolitical situation. The time has come to stick together between Europeans, while war is back on the continent. Winter will be a real test of solidarity for the 27, encouraged by the Commission to reduce their gas consumption by 15%. During their joint trip to kyiv on June 16, Emmanuel Macron and German Chancellor Olaf Scholz were delighted to be able to appear alongside Mario Draghi.
The image was flattering: three founding countries of the EU, which also happen to be the first three economic powers of the Union, displayed the solidity of their unity vis-à-vis Moscow, in spite of a variable dependence on the energies coming from Russia. For Elisabetta Gualmini, this geopolitical front is not sure to survive the next elections: “The three leaders involved in the sabotage of the Draghi government, that is to say the 5 star movement by Giuseppe Conte (antisystem, Editor’s note)Silvio Berlusconi de Forza Italy (right) and Matteo Salvini of the League (far right) are all friends or ex-friends of Vladimir Putin. »
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Early elections, a timetable to be set
Elections must be held within seventy days following the dissolution of Parliament. The situation is complicated by the budget, which must be presented to Parliament by October 15.
In case the dissolution is pronounced in the next few days, the elections could be held on September 18 or 25. To avoid an election campaign “under umbrellas”the date of the dissolution could be postponed to October 2.
The current electoral law is a complex mix of proportional and first past the post. The arch favorite is the so-called coalition “center-right”, which brings together Forza Italia, by Silvio Berlusconi, and the extreme right with the Northern League by Matteo Salvini and Brothers of Italy, by Giorgia Meloni. This party is given first in the voting intentions.