Italian PM Conte quits, leaving country adrift in midst of pandemic

Bloomberg

Italian Prime Minister Giuseppe Conte resigned after losing his Senate majority, plunging the country into political uncertainty just as it’s battling the pandemic and a recession.
Weakened by the defection of a junior partner, Conte offered his resignation to President Sergio Mattarella on Tuesday, according to a statement from the president’s office. The head of state, who oversees attempts to forge new governments, will hold a round of talks with party leaders before he nominates someone to forge a fresh coalition, the statement said.
Conte is angling for a new mandate to form what would be his third government in four years. His plan, according to officials familiar with his thinking, is to forge a broader alliance including pro-European centrists and unaffiliated lawmakers — and possibly even bringing back some members of ex-Premier Matteo Renzi’s Italy Alive party, who abandoned his second administration earlier this month.
But Mattarella could also decide that there’s a better candidate to pull together a majority in the fragmented parliament, or even that elections are necessary to return the country to political stability.
After fighting for two weeks to shore up his position, Conte’s hand was forced by prospect of losing a Senate vote on judiciary due as soon as Wednesday. A defeat there would have damaged his authority and reduced his chances of being granted a new opportunity by Mattarella, according to an official who spoke before the resignation.
The timing of the turmoil has baffled many Italians, with the more than 400 people a day dying while Conte and Renzi tussled and growing evidence of a further hit to the country’s battered public finances. But there was also unease at Conte’s willingness to use emergency powers just as the prospect of the European Union’s recovery package is raising the stakes.
Officially, Renzi’s dispute with Conte was driven by disagreements over how the 209 billion euros ($250 billion) of grants and loans should be spent and how the spending should be controlled. But there’s also an awareness that whoever is in power over the next two years stands to reap the political gains from that windfall.
Compared to previous bouts of political instability in recent years, Italy’s bond markets have been tranquil, thanks largely to the support provided by the European Central Bank’s stimulus. The nation’s 10-year yield spread over Germany, a key gauge of risk, reached its lowest point in almost five years earlier this month and even now is trading less than 20 basis points higher at around 120 basis points.
For the time being, though, the Treasury is starting to factor in a bigger hit to the country’s battered public finances this year as another extended lockdown holds back the recovery, a senior government official said.
Treasury models suggest the budget deficit may reach as much as 9.2% of output this year, that official said. The government is also looking at a deteriorating outlook for growth and could see the economy expand as little as 4.5% in a worst-case scenario, according to the official. The government’s official projection from October is for a 6% expansion.
For the 56-year-old Conte, a lawyer plucked from Florence academia to head his first government in 2018, it’s the second time he’s seen his coalition fall apart. When Matteo Salvini of the anti-migrant League abandoned Conte in 2019, the premier replaced him with the center-left Democratic Party.
This time around, the Democrats and Conte’s main allies, the Five Star Movement, are divided even internally on whether or not to negotiate with Renzi, with many believing he cannot be trusted after sniping at the coalition for months and then pulling out, the officials said. One consideration that delayed Conte’s resignation was the concern that Renzi would seek to maneuver someone else into position to replace him as prime minister.
While some of the premier’s allies have raised the prospect of early elections to resolve the impasse, coalition leaders still see this is an unlikely option, officials said. Conte’s supporters fear that the center-right would win a snap vote, and fewer seats will be available after parliament was downsized in a constitutional reform.