Will Italian financial markets withstand Draghi’s departure?

Could the likely victory of far-right parties in Italy’s parliamentary elections on 25 September trigger a crisis in Italian financial markets? This will depend on: The e conomic policy announcements and stance towards Europe taken by the new government (likely to be led by Giorgia Meloni ). Any decision in the direction of conflict with the European Union (renegotiation of Next Generation EU for example) would have a highly negative effect on Italian financial markets; Italy’s eligibility for the Transmission Protection Instrument (TPI), which enables the ECB to control yield spreads between the euro-zone countries. Beyond the reinvestment of PEPP principal re payments (sterilised purchases of a country’s government bonds by the ECB), a country’s fiscal trajectory must be compatible with the fiscal rules and its macroeconomic policy must be sustainable. To determine whether a country is eligible for the TPI, the ECB will consider the views of the European Commission, the ESM, the IMF and its own views. If the new Italian government conducts a highly expansionary fiscal policy ( Meloni is campaigning on a 15% flat tax), Italy could be stripped of its eligibility for the TPI. A nationalist industrial policy (rejection of foreign companies) would also point in this direction.