Italian prime minister’s resignation kicks off fresh uncertainty and could push up borrowing costs


Italian Prime Minister Giuseppe Conte gestures as he delivers a speech at the Italian Senate, in Rome, on August 20, 2019, as the country faces a political crisis.Andreas Solaro | AFP | Getty Images

Italy's prime minister, Giuseppe Conte, formally tendered his resignation Tuesday evening in Rome, after a day of confrontational drama in the Italian Senate triggered a fresh round of uncertainty over the country's political future but also a surprisingly beneficial jolt to its borrowing costs with yields falling.

Conte, a law professor-turned-premier who was handed power after inconclusive elections last spring, assailed Matteo Salvini, his deputy prime minister and interior minister, repeatedly in an address to the upper legislative chamber. He said Salvini's demands earlier this month for a fresh national vote, which had precipitated the current crisis, had been "irresponsible" and rooted in personal and partisan motives.

Salvini heads the anti-immigrant and euroskeptic League (Lega) party that currently tops Italian polls, and has repeatedly clashed in recent weeks with the Five Star Movement (M5S). The latter anti-establishment populists hold the largest share of seats in the Italian Parliament, and only grudgingly agreed to form an alliance with Lega last year after months of protracted negotiations.

As a compromise candidate for prime minister who was proposed by M5S, Conte had been forced to steer the divided coalition government through budgetary conflicts with the European Union, while also tamping down frequent public spats inside his own Cabinet.

But his speech Tuesday afternoon was anything but conciliatory, and a fierce and immediate riposte from Salvini minutes later seemed to mark the irreparable breakdown in relations between the two erstwhile colleagues.

Conte ennumerated "all the worst things he could say about Mr Salvini," according to Lucio Malan, deputy Senate leader of the center-right party spearheaded by former Prime Minister Silvio Berlusconi, Forza d'Italia, which shared an electoral ticket with Salvini's Lega last year, and has aspirations to cooperate with Lega again in the future.

"If we can make a serious platform, to contrast illegal immigration and to boost the Italian economy — we are ready," Malan acknowledged. But he insisted such a collaboration would only be possible if Salvini and his Lega colleagues ceased all further discussions of a possible Italian exit from the European Union, since such comments were not "reassuring to the markets."

Rome's often fraught relationship with Brussels has remained central to investors' focus during the 14 months since the coalition government took power on a shared platform that promised lower taxes, plus higher social welfare and infrastructure spending.

Italy's debt-to-GDP ratio tops 131%, the highest in Europe with the exception of Greece. And with Italian growth rates largely stagnant this year and likely next year, too, the government has continued to risk an overshoot of the deficit spending levels that the European Commission sets for members of the shared currency bloc.

A packed chamber and press gallery relished the frequent trading of insults and interruptions for well over an hour, despite the Senate president's repeated attempts to encourage civility, before another former premier, Matteo Renzi, stood up to lambast Salvini further.

His Democratic Party (Partito Democratico or PD) has struggled in opposition and proven an easy target of criticism from both Lega and M5S for its introduction of unpopular austerity measures and largely lackluster efforts to tackle the high unemployment figures engendered by the Great Recession of 2008 and more recent European debt crisis.

But some lawmakers and analysts say that a tie-up between PD and M5S could now be the default option for President Sergio Mattarella, the veteran politico and head of state who will now lead consultations between party leaders to see if a new parliamentary majority can be formed and fall elections staved off, at least until the spring.

And Conte could yet retain a chance of staying at the peak of Italian politics, according to Forza d'Italia's Malan, since a manifesto-style portion of his speech Tuesday included "words, issues and arguments that are dear to the left of our Parliament — and that was meaningful."

But according to Lorenzo Codogno, a former chief economist at the Italian Ministry of Economy and Finance, "the most likely scenario remains early elections." In a recent research note he described the current situation as "the craziest and most inconvenient political crisis that ever happened in Italy."

The Italian Finance Ministry must submit a draft budget proposal to the European Commission by mid-October, before receiving formal sign off from the Parliament in Rome by year's end. This is a typically convoluted process and the accompanying political spats repeatedly spooked bond markets over a period of several weeks last year.

Conte said that Salvini's recent behavior made it unlikely that this year's budget would be passed on time, since any change in government — whether through the formation of some new majority or after a snap election — could delay or disrupt the approval process. That in turn might prompt an automatic rise in VAT rates, as well as further increases to Italy's national borrowing costs.


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