It was once again the turn of Italy on July 20. After being an unlikely bastion of stability for the past 18 months under the steady hand of respected former central banker Mario Draghi, the country was thrown back into political chaos when he resigned after the government unexpectedly collapsed.
To his admirers, Draghi – or “Super Mario” – was seen as the country’s most capable and effective prime minister for generations. But it seems no one in Italy, not even the man credited with saving the euro, can rise above Rome’s machinations.
According to the popular account, Draghi, like Shakespeare’s Julius Caesar, was stabbed in the back by his colleagues, the victim of a right-wing plot. La Stampa cried political murder, The Republic led with “Italy Tradita– Italy betrayed.
With elections now scheduled for September 25, the country is once again facing political unrest. With a war in Ukraine, a food and energy crisis, rampant inflation and a looming recession, the timing couldn’t be worse.
Learn more in Daily Maverick: “Mario Draghi saved the euro, but Italian politics beat him”
Cui bono? Who wins ? Early indications are that Giorgia Meloni’s far-right Italy Brothers are set to be the biggest winner, alongside right-wing League allies Matteo Salvini and Silvio Berlusconi.
Their illiberal political views are akin to those of Viktor Orbán’s Hungary. They are anti-EU, anti-immigrant, Islamophobic and uncompromising on LGBTQIA+ rights.
For these ideologues, economic policy and much-needed structural reforms are an afterthought. At this critical moment, they pose a threat to European unity on many fronts.
Ironically, Europe’s insurance policy against a lurch towards an economically destabilizing right-wing government in Italy is the country’s economic fragility.
Italy’s debt remains extremely high, at more than 150% of GDP. Whoever succeeds as prime minister will have to refinance 200 billion euros of debt maturing by December.
Yet, by chance, the future of Italy – and indeed of Europe – may be shaped more by what happened on July 21 in Frankfurt than by the Eternal City.
After announcing the first interest rate hike since 2011 – a historic half a percentage point, at that time – European Central Bank (ECB) Governor Christine Lagarde unveiled her transmission protection instrument ( TPI).
Not to be confused with the syphilis test of the same name, this program is designed to help any eurozone member state cope with “undue” (read, Italy) financial stress.
If investors were seen selling a member state’s bonds indiscriminately, they would effectively be forcing the hand of the ECB to act and intervene directly in the market, buying bonds and keeping yields low. It is an instrument intended to avoid the “fragmentation” of the euro zone.
The problem is in the detail. Although the decision of when the ECB can intervene rests solely with the bank, the TPI comes with conditions. Eligible countries must be able to demonstrate fiscal sustainability and sound macroeconomic policies.
It will be tricky if Italy no longer has a credible leader, but rather a populist spitting fire and brimstone.
For now, the market is reassured. After aggressive selling last week, Italian bonds have stabilized at levels not seen during the last financial crisis. The critical spread with German bunds stabilized at around 220 basis points (bps), well below the critical 250 basis points considered the danger zone.
But inflation – and the need to raise interest rates – is going nowhere.
Italian bond yields are still trading higher than those of former problem child Greece.
As the Italian political circus rumbles on in the fall, there is likely to come a time when the ECB’s resolve will be tested by investors.
With economically illiterate ideologues stalking Palazzo Chigi, bond investors may seek to exploit eurozone weakness by attacking Italian bonds.
Autumn promises to be stressful and unstable in Europe.
After his betrayal, Draghi will watch from the sidelines, no doubt with some schadenfreude for his former colleagues. DM