Mario Draghi signals he is about to step down after Italian coalition unravels

Italian prime minister Mario Draghi has signaled he is planning to hand his resignation to the president, bringing an abrupt end to a government seen to have had a once-in-a-generation opportunity to unlock the nation’s economic potential and set it on a higher growth trajectory.

In a brief appearance at the lower house of parliament on Thursday morning, Draghi told lawmakers that he was on the way to the presidential palace to meet President Sergio Mattarella. “After yesterday’s debate I have drawn my conclusions,” he said.

Draghi’s national unity coalition, established early last year in the depths of the Covid-19 crisis, unraveled on Wednesday after a rancorous parliamentary debate. His likely exit, which is expected to trigger snap elections in the autumn, comes as the eurozone’s third-largest economy faces mounting challenges: slowing growth, inflation and higher borrowing costs for its debt pile.

The collapse of Draghi’s coalition has triggered alarm among investors. The yield on Italy’s 10-year government bond jumped 0.14 percentage points to 3.52 per cent, as its price dropped sharply on Thursday. That move took the gap between Italian and German benchmark 10-year yields — a closely watched gauge of market stress — to 2.26 percentage points, reflecting a widening of 0.22 percentage points in just two days.

In the parliamentary debate on Wednesday, Draghi accused some members of his cross-party coalition of attempting to subvert his reform agenda and demanded that they recommit to it.

But two center-right parties — Matteo Salvini’s League and Silvio Berlusconi’s Forza Italia — together with the populist Five Star Movement led by Giuseppe Conte boycotted the vote of confidence in his leadership.

Foreign minister Luigi Di Maio, who led a walkout from Five Star last month in protest at Conte’s sniping at Draghi’s policies, called the government’s collapse “a black page for Italy”.

“We played with the future of Italians,” Di Maio said in a tweet after Wednesday’s developments. “The effects of this tragic choice will remain in history.”

Italy‘s inflation rate hit 8 percent in June, its highest level since 1986, according to the statistical agency. Faltering on a tight schedule of promised reforms would also jeopardize Rome’s ability to receive the next tranches of its €200mn in funds from the EU’s Covid recovery fund.

Draghi had agreed an ambitious schedule of reforms with the EU with a plan to enhance competition and cut red tape to make Italy more attractive to investment, and to guarantee the sustainability of its heavy public debt, now at about 150 per cent of gross domestic product .

Many of these reforms were expected to be completed by elections scheduled for next spring. But the process is likely to be put on hold, as parties gear up to campaign for snap elections — which the rightwing bloc, led by Giorgia Meloni’s Brothers of Italy — is expected to win.

A FTSE index of Italian stocks dropped 1.9 percent in early trading, taking its losses over the past two days to 3.5 percent.

The tumult in Italy’s bond markets comes as the European Central Bank is expected to raise interest rates in the eurozone on Thursday for the first time since 2011, and announce new policies to limit the divergence between the borrowing costs of the bloc’s strongest and weakest economies, including Italy.

Draghi’s exit will also be a setback to the western alliance against Russia’s invasion of Ukraine. The Italian leader has taken an uncompromising stand towards Moscow and was a key architect of the tough sanctions against Russian president Vladimir Putin

Berlusconi, a former prime minister, had close personal ties with Putin, with whom he once went on holiday, while Salvini has been an admirer of the Russian leader.

Additional reporting by Harriet Clarfelt in London and Silvia Sciorilli Borrelli in Rome

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