Draghi Finally Steps Down, ECB Big Step... Is Europe Facing a 'Perfect Storm'?

Coalition Collapses with Prime Minister's Resignation
Unprecedented Early General Election in Italy in September
Disruptions Inevitable for Next Year's Budget and More
Right-Wing Three-Party Alliance Expected to Secure Majority

Italian President Sergio Mattarella (right) signs the decree dissolving parliament at the Quirinale Palace in Rome on the 21st (local time), while Prime Minister Mario Draghi, who submitted his resignation, looks on.
[Image source=Reuters Yonhap News]

[Asia Economy Reporter Kim Hyunjung] Mario Draghi, Italy's Prime Minister, resigned on the 21st (local time), leading to the eventual collapse of Italy's coalition government. There are concerns that Italy's political instability, combined with the global stagflation trend, could result in a 'perfect storm' level shock with multiple major adverse factors hitting simultaneously.

On the 21st (local time), Bloomberg reported that Italy plans to hold an early general election on September 25, with current polls showing the center-right coalition leading. President Sergio Mattarella officially announced the dissolution of parliament and the holding of early elections on the same day Draghi resigned.

Draghi appeared before the Chamber of Deputies that morning to express his intention to resign, and President Mattarella accepted it but requested that he maintain his position temporarily to prevent a governance vacuum. The original term of the current parliament, formed through the March 2018 general election, was until the first half of next year.

This will be the first time in Italy's constitutional history that a general election is held in the fall. Consequently, administrative and legislative processes, including the formulation of next year's budget scheduled for autumn, are expected to face inevitable disruptions.

The current situation appears favorable to right-wing parties. If the three right-wing parties?the far-right Lega, Brothers of Italy (FdI), and Forza Italia (FI) led by former Prime Minister Silvio Berlusconi?form an alliance, they are likely to secure a majority of seats.

Public opinion has also clearly shifted toward right-wing parties. In polls conducted after Draghi's resignation announcement, Brothers of Italy garnered 23.2% support, emerging as the core of the right-wing coalition. The Democratic Party followed with 22.2%. The far-right Lega party received 15.1%, the Five Star Movement (M5S) 11.3%, and Forza Italia 8.1%. If the right-wing coalition secures a majority, Giorgia Meloni, leader of Brothers of Italy and a member of the Chamber of Deputies, could become the first female prime minister in Italy's constitutional history.

Earlier, Draghi submitted his resignation abruptly after the Five Star Movement, the central pillar of his national unity government, abstained from the Senate vote on a livelihood support bill proposed by the cabinet on the 14th. Although President Mattarella proposed a confidence vote in parliament, major parties boycotted it, leading Draghi to step down after just one year and six months in office.

ECB Unanimous Rate Hike for the First Time in 11 Years
Italy's Debt at 150% of GDP Poses Crisis
Concerns Over Possible EU Exit by Next Cabinet
JP Morgan Calls It a "Populist Coup"

[Image source=Reuters Yonhap News]

The collapse of the Draghi cabinet has also increased instability within the European Union (EU). Draghi, a former president of the European Central Bank (ECB), was appointed by President Mattarella in February last year after the coalition led by then-Prime Minister Giuseppe Conte (now leader of the Five Star Movement) collapsed, raising expectations in European society as a 'firefighter' to resolve political and economic crises. Moreover, Italy's economy is the third largest within the EU. Internally, it has become more difficult to gain agreement on reforms necessary to secure 200 billion euros in EU aid led by Draghi.

The timing of the resignation announcement, coming after the ECB's 'big step' (a 0.5 percentage point increase in the benchmark interest rate), has further heightened concerns. There are growing fears that Italy, with a debt-to-GDP ratio reaching 150%, could face a debt crisis. Italy's 10-year government bond yield rose to 3.7% that day, and the spread with German bonds widened to 2.41 percentage points. The FTSE MIB index in Italy experienced a sharp drop of over 2% during the session but recovered somewhat to close down 0.7%.

There is analysis that if Italy's political instability combines with the recent stagflation trend, the economic shocks could multiply simultaneously, creating a massive complex crisis known as a 'perfect storm.'

Krishna Guha, Head of Policy and Central Bank Strategy at U.S. investment bank Evercore, told the Financial Times (FT), "The combination of a massive stagflation shock caused by weaponized Russian natural gas and Italy's political crisis is close to a 'perfect storm' that the European Central Bank (ECB) can hardly imagine." Some voices also express concern that Italy's next cabinet might pursue an EU exit, similar to the United Kingdom.

JP Morgan analysts stated, "The shocking collapse of the Draghi administration raises important questions ahead of the new election," diagnosing that "the populist coup against Draghi increases our sensitivity to risks arising from erratic policy decisions."

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