Why is Italy’s government in crisis and what does it mean for the EU?

Italy’s prime minister, Mario Draghi, announced his resignation on Thursday after one of the parties in his national unity government refused to back him in a confidence vote on a controversial cost-of-living bill.

The move has thrust Italy, which has been struggling to recover from the economic hit of the pandemic, into uncertainty as it opens up the possibility of early elections.

“The parliamentary majority that supported the government no longer,” Draghi said on Thursday.

President Sergio Mattarella did not accept the prime minister’s resignation and asked him to address parliament next Wednesday. It is likely, analysts say, that there will be a confidence vote after his speech.

His resignation could set the stage for early elections that could take place as early as October. The next election is due in spring 2023.

EU-friendly prime minister

The former European Central Bank chief had been hand-picked by Mattarella to lead a national unity government in February 2021, tasked with leading Italy on a path to economic recovery after the Covid-19 crisis. He implemented a series of reforms in exchange for EU pandemic recovery funds.

Parties from the centre-left Democratic Party to the far-right League rallied behind the new prime minister at the time, as did most Italian newspaper and the international press. The financial markets saw him as a guardian of stability, and regained confidence in the country’s economy despite its spiralling public debt, which by then had reached more than 150 percent of GDP.

But the Italy’s borrowing costs have been rising nonetheless during Draghi’s 17-month tenure.

"This shows I'm not a shield against all events. I'm a human being, and so things happen," he recently told reporters.

Already on Friday, the pollical turmoil was putting pressure on the Italian stock market.

The fear is that Italian debt, amounting to 2.5tn euros, is too large to bailout and a default could drag the entire Eurozone down.

Eurozone countries’ public debt has snowballed during the pandemic, and the Russia-Ukraine crisis has ushered in new economic woes due to the EU’s reliance of Russian gas and Moscow’s attempt to use it as leverage against the bloc in response to the sanctions imposed over the Ukraine war.

Italy relies on Russia for 40 percent of its gas. High energy costs have sent inflation through the roof, triggering a cost-of-living crisis across the bloc.

Far-right could capitalise on the crisis

Draghi’s decision came after the Five Star Movement (M5S), a party led by former prime minister Giuseppe Conte, boycotted the vote on a €26bn cost-of-living bill, arguing it fell short on funds to help households and businesses hard-hit by inflation and high energy costs.

If Draghi does not come to an understanding with the M5S, one of the possible scenarios is a cabinet reshuffle that will see the movement excluded from the governing coalition. The risk of early election would remain as the government would be in a weaker position as a result.

If Draghi pulls out, a new prime minister could be tasked with forming a new unity government, whose main aim would be to deliver Italy’s next budget plan by the end of December, with early elections likely to take place.

Polls suggest that a right-wing coalition would be likely to win a snap election held in the autumn.

Italy’s far-right, national-conservative Brothers of Italy, a party with neo-fascist origins, made huge gains in local elections held across the country in June, emerging as the strongest party in a coalition that includes Matteo Salvini’s League and Berlusconi’s Forza Italia.

This is mostly due to the party’s decision to stay out of Draghi’s unity government last year to become the main opposition force. The party’s leader, Giorgia Meloni, could become Italy’s first female prime minister should the coalition win.