Italy: Pax Romana is no more…

After informing the Italian Lower House earlier in the day , Prime Minister Mario Draghi officially tendered his resignation to President Sergio Mattarella later on Thursday. The decision came after the collapse of the government of national utility formed in February 2021. Clouds are gathering over Italy at both political and economic levels. The reforms to which the country needs to commit to obtain further EU funding are now on hold. It is also far from certain the snap elections this autumn will deliver a solid parliamentary majority. Financial markets have signalled their concerns, the most telling sign being the widening of BTP spreads. This umpteenth Italian political crisis comes at a crucial time, in the midst of the war between Russia and Ukraine, when the entire European Union faces huge climate and energy challenges, and will affect a country with already fraught public finances for many years . As regards spreads, in what promises to be a very unsettled environment, a further significant widening is on the cards until the budget is passed. On the other hand, the risk of a pronounced contagion to other peripherals appears limited. The European Central Bank’s adoption of the Transmission Protection Instrument (TPI) is intended to guard against any fragmentation risk.