The situation in Italy is always serious, but rarely hopeless. Draghi is definitely leaving as Prime Minister of Italy. After President Mattarella initially refused him his resignation, the last attempt to reconcile the coalition failed. Draghi still has a lot of support among the Italian population, 50 to 65 per cent would have preferred him to stay on. This may help in the upcoming elections. Meanwhile, the hashtag #poveraItalia is trending on social media.
The anger is now directed mainly at the Five Star Movement and Lega, the parties that caused the crisis. Yet it seems better for the survival of the eurozone that elections take place now rather than next year. Next year, Italy will probably be in a deep recession and there will be a new flow of refugees from Africa (possibly even bigger than after the Arab Spring and the current refugees from Ukraine). To hold elections at such a time would probably mean that more than 50% of the votes would go to right-wing and originally euro-sceptical parties.
If elections are held now, the Fratelli d'Italia will be the big winner. This right-wing opposition party was the only major party to successfully oppose the coalition led by Draghi. There will now be elections on 25 September. This could create problems in drafting a budget for next year, which is one of the conditions for receiving funds from the European recovery plan. Draghi may be gambling that he can work better (also with Europe) with the government that follows the September elections than with the coalition that results from next year's elections.
Draghi's government has lasted longer than average, no less than 17 months. Since the Second World War, Italy has had a new government 69 times. This is also due to the tactical game that is played every time a party thinks it will benefit from new elections. Furthermore, quarrels within a coalition break out more often than average.
Italy has not enjoyed participating in the first 20 years of the euro's introduction. The country is regularly plagued by recession and, all in all, the Italian economy is the same size as it was 20 years ago. Meanwhile, the debt has risen to 150% of GDP, which, at normal interest rates, means that the debt is rising faster than the economy will grow. The greatest risk is that the right-wing parties will decide that leaving the euro is the solution.
Recent developments in interest rates continue to show that the eurozone is a divergent and therefore inherently unstable system. The advantage of leaving is that instead of painful reforms, the adjustment is painless via the currency. When Italy leaves the eurozone, the European Union will probably end too. It will be succeeded not long afterwards by a new Union potentially twice the size (including the UK, Switzerland, and Scandinavia).
At the same time, Italy has been in decline since the fall of the Roman Empire and, in the meantime, was the cradle of the Renaissance, opera, radio, the piano, newspapers, espresso machines, banks and Ferrari. For three centuries, the Venetian ducat and the Florentine florin were even the world's reserve currencies. Europe's strength clearly lies in its plurality, not its uniformity. Yet the simple fact that there are now elections in Italy could cause another euro crisis. Speculation on the outcome of the elections will keep foreign investors away for a while. 25 September is not the best time for an election on the stock market and there is little chance of a stable coalition emerging afterwards. The ECB will watch over Italy in the eurozone but is forced to move to higher spreads than it would like. A spread of 300 basis points inevitably means that Italian debt will eventually be unsustainably high.
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