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The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

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Walking the Line: Mario Draghi's resignation and Eurozone fragmentation

euro-g0324ad51b_192_20220723-155010_1 Mario Draghi during his tenure as President of the European Central Bank

"Because you're mine, I walk the line", as the Johnny Cash song goes: Mario Draghi tried to walk the line, but he found himself unable to. The Italian Prime Minister and former ECB President has tendered his resignation to President Mattarella following a week of uncertainty as to the future of his technocratic government.

The Draghi government's guiding mission of ever-closer integration faces a setback; the flaws of a Union seeking integration post-Covid left exposed with the rose-tinted idealism of the road to a more centralised EU faces a new conundrum.

The former President of the European Central Bank, he was dubbed 'saviour of the euro' in that role by the FT, and he entered government with a missionary zeal for reform, something he was heralded for. For certain quarters, the formation of Draghi's government represented a dose of stability and non-partisanship in a country that has had 69 governments since the war. More importantly he represented a shot as consensus around reform in Italian politics - possibly an overzealous one.

Yet, consensus was not to be: Coalition partners he relied upon to establish his technical government, the Five Star Movement (M5S), Lega Nord, and Forza Italia, all walked out of a vote of confidence called by the Prime Minister - their no show taken as a sign of no support, with the League and Forza Italia refusing to remain in Cabinet unless the left-populist M5S was excluded.

There are a myriad of reasons for this divide within Draghi's then-already fragile coalition. The reason was technically either a waste incinerator or the Decreto Aiuti (Decree on Economic Aid) - but became a broader question, in the media, about his reformist agenda - designed for Italy to fulfil the conditions of the EU Covid Recovery fund, Next Generation EU (NGEU), a €200 Billion plan for Italy and one of the main goals for Draghi's government from the get-go. The controversial reforms, for which discontent has been simmering for some time, came to a head last week over the waste incinerator in Rome, when M5S walked out of a parliamentary vote of confidence (leading to his first resignation, which was not accepted).

Italy does not need a pact of trust that is a facade, that disappears when faced with thorny measures. 

Prime Minister Draghi's address to the Senate, 20 July 2022

The Great Reformation?

The reforms themselves are wide and varied and ostensibly seek to bring in fairer competition, with some of the headline reforms causing great consternation for Draghi each step of the way. Many of these sought to draw a line under past grievances between previous governments and the EU.

The agreement to terminate beach concessions, which fill the beaches with the deckchairs, umbrellas, and food stalls for tourists, fuelled worries that the government was trying to make life harder for family-owned concession businesses - though some argued it opened up competition for use of the beaches. This prompted outcry from Matteo Salvini's League and the Brothers of Italy parties - probable fear that a pseudo-Club Med will set up shop on the Sardinian beaches like a scene from the Blob.

'Ghost houses' may evoke images of haunted houses and Stephen King novels, but in this case they refer to the estimated 1 million houses that go unregistered. Land registry reform: another key reform that caused an outcry amongst the centre-right in the coalition, also designed to meet conditions for the NGEU funds. PM Draghi's attempts to regularise those unregistered houses, but rankled Lega Nord and their leader Salvini over fears of higher taxes. While the original policy was supposedly to modernise means of identifying land use - the idea of the state assessing market value rubbed some up the wrong way.

The Ex-Prime Ministers

There is reason to suspect a degree of bad blood amongst members of the Draghi government caused the government's own downfall. Former Prime Ministers Giuseppe Conte, Silvio Berlusconi, and Matteo Renzi are all political leaders of parties who are members of his government. Looking at the relationship between Ex-PMs Conte - M5S President - and Renzi, it shows that in politics, memories are far from short.

Under Conte's government, which directly preceded Draghi's, Renzi's new party Italia Viva served as a member for two years, until the resignation of all 3 of Italia Viva's ministers led to the downfall of Giuseppe Conte's government - and it was not before long when Renzi ended up becoming Draghi's biggest supporter for the Premiership. The public enmity between the two party leaders Conte and Renzi is clear, with former PM Renzi asking Conte's M5S to 'let us know what it intends to do', as 'the country can no longer wait'. One could say personal politics has furthered this divide.

Next-Gen EU Funds

Those controversial reforms, scuppered by the fall of the Draghi government, were to meet the conditions of the Next Generation European Union funds, the EU's covid recovery plan. Italy is to be the biggest beneficiary of the EU-wide NGEU package, with €235.1 billion in funds destined for Italy. The plan to spend those funds, written by Draghi's government and sent to Brussels, included commitments to those controversial structural reforms.

This comes at an uncomfortable time for the European Central Bank as it unveils its anti-fragmentation tool, the TPI, where the gap between Italian and German government bond yields continues to jump. This bond buying programme will face new uncertainty after Draghi's resignation and efforts to protect the eurozone from speculation face new hurdles. The resignation and rise in Italian bond yields following the resignation is combined with the recent ECB deposit rate (the first in a decade) means the spreads will continue to widen.

Hence, the ECB TPI's effectiveness remains to be seen, with the search to find a 'sweet spot' for borrowing costs, alongside the right amount of strength for a bond buying plan, becoming ever more difficult.

A set of circumstances that originated from beach concessions and incinerators now threatens the fragile Eurozone and risks fragmenting bond yields in a Eurozone and EU that seeks ever-closer union. Integration isn't a unilateral decision, and the halfway house has its weaknesses and risks. This set of circumstances - all part of the push for NGEU funds eligibility - now threatens to undermine their very goals.

When stalled reform threaten a myriad of other factors wider than could have been imagined, and when the bedrock of monetary stability is threatened, only wider union-wide reforms, not digging heels in, can be a solution to the quagmire we see. Moreover, the flaws of such a EU and the structure of the eurozone should be taken as a lesson in the UK on the danger of chop-and-change politics. 

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