Rome After only a year and a half of political stability, Italy fell into the next government crisis this Thursday. Mario Draghi’s coalition is in danger of collapsing, the prime minister submitted his resignation to the president in the evening – who initially rejected it. Turbulent days are now ahead of Roman politics. What are the effects of the crisis in Europe’s third largest economy on Germany and the euro zone? What does that mean for the energy crisis and Europe’s Ukraine policy? These are the five most important questions about the government crisis:
Italy bears almost a quarter of the debt in the euro zone, the sum has recently increased to around 2.7 trillion euros due to the pandemic, a new record. The level of debt is 150 percent of economic output, only Greece is worse off. The spread, i.e. the difference between German and Italian government bonds, climbed to 222 basis points on Thursday evening – last summer, when the country was in an unprecedented upswing after the corona crisis, this value was usually between 100 and 120.
On Thursday, the yield on ten-year Italian government bonds also rose immediately to 3.54 percent. Even if all this does not sound good, a new currency crisis does not immediately break out. Italy’s debt sustainability is not at risk because government bonds have an average term of seven years.
It is true that debt service will become more expensive in the short term. Compared to previous years, however, it is still lower on average than it was during the crisis, because Italy was recently able to raise new money very cheaply during the extremely low interest rate phase. On top of that, Italian banks are doing much better today than they were during the last euro crisis. Equity ratios are much higher today, the number of bad loans has been massively reduced.
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2. Are billions still flowing out of Brussels?
Draghi is seen abroad as an anchor of stability, who had the plan for the Brussels reconstruction fund rewritten and helped Italy regain international standing. The country gets more than 190 billion euros from the Corona pot, more than any other member state. However, the further payments from Brussels are linked to the implementation of the reforms that Draghi has promoted in recent months. EU Economic Commissioner Paolo Gentiloni said Brussels was following the escalation of the crisis in Italy with concern and dismay.
surcharge
3,549
percent
was the interest rate on a ten-year Italian government bond shortly after Draghi’s resignation.
Should there be new elections, there is a risk that budget planning and urgently needed reforms will be delayed – so there is a question mark over the billions in aid from Brussels. Especially if suddenly Eurosceptic parties from the right-wing camp could find themselves at the top of the government. In the event of early elections, a party alliance made up of the right-wing Lega and the “Brothers of Italy” is conceivable. The latter have been leading the polls for a few weeks – although party leader Giorgia Meloni has never officially renounced fascism.
3. What does the crisis mean for the markets?
The Italian stock exchange reacted immediately to the uncertainty in politics, the prices in Milan plummeted in the afternoon, the stock exchange closed down 3.4 percent – the lowest level since November 2020, i.e. in the middle of the corona crisis. The political nail-biter could now continue to slow down the markets – and thus further depress the already severely weakened economic growth of an estimated 2.7 percent.
Before the Ukraine war, Italy’s government was assuming growth of 4.6 percent for the current year. However, the value was quickly corrected downwards due to the disrupted global supply chains, the hitherto heavy dependence on Russian gas and the inflation that was particularly driven by energy prices.
The powerful industry association Confindustria was appalled by the latest development. He was “completely stunned,” said the head of the association, Carlo Bonomi, at an event on Thursday. The crisis is not only hitting Italy in the midst of concerns about the Ukraine war and the energy shortage: the corona numbers have been skyrocketing again for weeks. In addition, one of the worst droughts in recent history is currently prevailing, with harvest losses and billions in losses for farmers.
Germany is Italy’s most important trading partner worldwide. Last year, 12.8 percent of all exports went to Germany, 16.4 percent of all imports come from the Federal Republic. Both economies are closely interlinked, especially in sectors such as the automotive industry, mechanical engineering and chemicals. If Italy is doing badly, the effects can also be felt directly in German companies.
4. What will change in Europe’s Ukraine policy?
Draghi has taken an extremely tough stance on Russian President Vladimir Putin since the start of the war. In turn, he was the first Western politician to open up the prospect of accession to the European Union for Ukraine. It is also thanks to Draghi’s pressure that the EU states were finally able to agree on candidate status for the invaded country. This weighty voice could now be missing in Brussels
Similar to Germany, however, there was also an internal coalition dispute in Italy over the delivery of heavy weapons. A few weeks ago, part of the Five Star Movement split off because it no longer wanted to support the party’s anti-government and anti-NATO course. More than 60 MEPs have joined forces in the Together for Italy group, led by Foreign Minister Luigi di Maio.
In Russia, Draghi’s resignation was received euphorically. Former President and current Deputy Head of the Security Council Dmitry Medvedev posted a photo montage of British ex-Prime Minister Boris Johnson, Draghi and a head with a question mark on the Telegram news service. “Who will be next?” wrote Medvedev. After Johnson’s resignation, he wrote: “Ukraine’s best friends are leaving. Victory is in jeopardy! The first is gone…”
5. Is there an impact on the energy crisis?
Possibly yes. On Sunday evening, Draghi is supposed to start talks in Algeria and sign a gas agreement there. An additional nine billion cubic meters of natural gas are to be sent to southern Europe in this way, an important milestone in becoming more independent from Russia. As the counted prime minister, Draghi is now weakened in the talks. Apparently, he will not cancel the trip: Draghi is not scheduled to speak in parliament until Wednesday, directly after the planned return from North Africa, at the request of President Mattarella.
Algeria is connected to the Italian island of Sicily via the pipeline connection via Tunisia. Algeria is already the second most important supplier for Italy. Last year, the share of Russian imports was more than 40 percent, currently Russian gas accounts for only a quarter of imports.
More on the subject: Prime Minister Draghi wants to go, but President Mattarella won’t let him