Draghi, Italian Prime Minister, Announces Resignation Intent... Warning Signs of Southern Europe Fiscal Crisis

'Firefighter' Draghi's Resignation Raises Concerns... Is Europe Missing the Golden Time to Overcome the Crisis?
Debt Deepens Compared to Post-2011 Financial Crisis

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Hyunjung] As the coalition government collapses and Italian Prime Minister Mario Draghi expresses his intention to resign, concerns are growing that Italy's political turmoil could spread into a financial crisis across Southern European countries. President Sergio Mattarella rejected Draghi's resignation letter, but the growing political uncertainty raises fears that the golden time to overcome the economic difficulties may be lost. Especially, Southern European countries, which had high expectations for Draghi?former European Central Bank (ECB) president?to act as an 'economic firefighter,' are facing increasing confusion amid a flood of adverse factors such as COVID-19, energy crises, inflation, and austerity measures.

According to major foreign media including Bloomberg and ABC News on the 14th (local time), Draghi announced his intention to resign following the exit of the Five Star Movement (M5S), Italy's largest party, from the coalition government. President Mattarella did not accept the resignation and rejected it. Instead, Mattarella urged the parliament to explain the current political crisis and find solutions. Draghi is scheduled to appear before both houses of parliament on the 20th to clarify his position on the political situation.

◆ Adverse Factors Piling Up... Coalition Collapse = Draghi submitted his resignation because opposition voices grew louder regarding key issues such as public welfare support and aid to Ukraine, making it difficult to sustain the coalition government any longer. The trigger was the boycott by the Five Star Movement of the Senate confidence vote linked to a 26 billion euro (approximately 34.2376 trillion KRW) public welfare support bill.

The Five Star Movement, led by former Prime Minister Giuseppe Conte, has shown disagreements with Draghi over issues such as military aid to Ukraine and financial support for households and businesses struggling with inflation. Some are demanding Draghi form a new coalition government, and he may address this in his upcoming parliamentary speech next week.

Across Europe, facing the resurgence of COVID-19, energy crises, soaring prices, and recession fears, political crises have been occurring one after another. French President Emmanuel Macron recently lost his parliamentary majority in elections amid inflation concerns, and UK Prime Minister Boris Johnson resigned after multiple scandals.

President Mattarella's rejection of Draghi's resignation likely reflects the judgment that holding early elections immediately is difficult under these circumstances. Italy has never held autumn elections since World War II, as September and October are critical periods for drafting the next year's budget.

[Image source=Yonhap News]

◆ Difficulty Finding Solutions Amid Recession Fears = As a former ECB president, Draghi received high expectations from European society for economic responses and was evaluated as having handled issues such as the COVID-19 crisis and economic challenges smoothly. However, his short tenure, lack of delegated authority from voters, and ideologically heterogeneous coalition have always hindered comprehensive reforms.

If Italy, one of the Eurozone's three largest economies, fails to overcome political instability and chronic debt problems and faces an economic crisis, it is highly likely to spread into a crisis across Europe. This is especially true for Southern European countries, whose fundamental strength has been severely weakened by a serious debt crisis and who have significantly increased fiscal spending to respond to COVID-19.

Italy's government debt-to-GDP ratio, which was around 127% immediately after the economic crisis in 2012, has already reached 150% this year. During the same period, Greece's debt-to-GDP ratio rose from 162% to 185%, and Spain's from 86% to 118%.

Recently, as the '1 dollar = 1 euro parity' collapsed, the ECB must hasten tightening, but Southern European countries are holding it back. With the ECB, which had been cautious about raising interest rates due to recession concerns, announcing its first rate hike in 11 years this month, the collapse of Italy's coalition government and the prime minister's resignation could further complicate Europe's policy response to the financial crisis.

As the nightmare of the 2011 European financial crisis resurfaces, Milan's FTSE MIB stock index plunged 3.4%, hitting its lowest level since November 2020. Italy's 10-year government bond yield reached 3.51%, the highest in two weeks, and the spread between Italian and German bond yields widened to 2.34 percentage points, more than doubling since the beginning of the year. The ECB plans to introduce a mechanism next week to limit spreads between bond yields of various Eurozone countries, but Germany opposes it.

This content was produced with the assistance of AI translation services.