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(Bloomberg) – The Italian government led by Prime Minister Giuseppe Conte is at risk of collapsing amid the Covid-19 pandemic after the withdrawal of a junior coalition partner.
Former Prime Minister Matteo Renzi said his Italy Alive party was leaving the coalition, attacking Conte for not doing enough to tackle the country’s problems. Although the party is tiny, Conte is counting on it to maintain his majority in parliament.
Renzi’s decision creates a full-fledged government crisis with no clear solution in sight. Possible outcomes include another Conte government, a new prime minister, or even a snap election.
To withdraw at such a crucial time for the country is tantamount to “an act of courage,” Renzi said at a press conference in Rome. Conte’s government has not done enough to address issues from education to infrastructure to virus, the former prime minister said.
“We are not playing,” Renzi said, addressing critics who accused his party of political stance for weeks of preparation for the current crisis. “Democracy is not a reality show.”
Investors reacted to the heightened uncertainty. German bund futures rose around 20 ticks to their highest level on the day after the announcement, while Italian treasury bond futures fell. The cost of borrowing for the Italian government has risen slightly in recent days due to concerns of political instability.
The timing of the crisis for Conte could hardly be worse, with Italy grappling with a worsening pandemic and recession. A cabinet meeting scheduled for Wednesday at 8:30 p.m. is expected to discuss new virus restrictions, while on Thursday Conte prepares to approve a plan to widen the country’s deficit by around 24 billion euros ($ 29 billion). .
Renzi said his party was always ready to support plans for increased deficit spending and any measures needed to tackle the pandemic. He did not rule out a new government led by Conte, but said Italy Alive would not support any coalition, including Matteo Salvini’s League, an anti-migrant and anti-EU opposition party.
Presidential role
As Renzi’s two ministers now leave the government, attention turns to President Sergio Mattarella, who met Conte earlier on Wednesday. The role of the president, largely ceremonial, also includes responsibilities for safeguarding the political stability of the country.
If Conte chooses to step down, he could be mandated by Mattarella to attempt to forge a new alliance.
Otherwise, the Prime Minister could ask for a parliamentary confidence vote. But if it fails to convince enough centrist and unaffiliated lawmakers to replace Renzi’s Italy Alive, the government would become an interim administration with limited powers.
Existing coalition parties – including Italy Alive – could also try to revive their alliance under another prime minister, such as former European Central Bank president Mario Draghi. They will likely explore a range of options to avoid a new election, as polls show the Salvini-led center-right would likely win if the country were forced to an instant vote.
“The impact of Renzi’s decision on Italy’s fragile economy will depend on what happens next,” said Lorenzo Pregliasco, policy analyst at YouTrend. “An instant vote, the worst-case scenario for investors, remains unlikely at this point.”
Renzi had been stepping up the pressure on Conte since late last year, criticizing the prime minister’s plans to manage and spend European Union rescue funds. Renzi says the plan was improved following his demands, but insisted on other conditions, including that Italy operate a line of credit from the European Stability Mechanism for health spending.
“The real problem is, should we be spending more money on health with MES?” Renzi said after his announcement on Wednesday.
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