Italian Prime Minister Mario Draghi arrives for a press conference in Rome, Italy, on July 12, 2022.
STR | Xinhua News Agency | Getty Images

Political uncertainty returned to Rome Thursday with the government in a state of limbo and Italian Prime Minister Mario Draghi being urged to rethink his resignation.

Draghi on Thursday said he would quit as Italian leader, after a political party in his ruling coalition refused to participate in a confidence vote earlier in the day.

“I will tender my resignation to the president of the republic this evening,” Draghi told the Cabinet, according to a statement translated by Reuters, throwing Italian politics back into a fragile state of affairs.

But the Italian head of state later on Thursday rejected Draghi’s resignation and asked him to address Parliament to get a clear picture of the political situation, according to a statement from President Sergio Mattarella’s office.

The Five Star Movement, one of the parties in the coalition government led by Draghi, had earlier opposed a new decree aimed at lowering inflation and battling rising energy costs. Italy’s lawmakers held a confidence vote on the wide-ranging policy package, but Five Star boycotted despite Draghi threatening to step down if the party didn’t back it.

Analysts, however, contended that the opposition to this policy package is not so much ideological but a result of internal party disputes.

“The move by the M5S was largely triggered by turmoil prevailing within the ailing party rather than by meaningful policy differences with the executive,” Wolfango Piccoli, co-president of the consultancy firm Teneo, said in a note Thursday.

After Mattarella’s rejection of Draghi’s resignation late Thursday, the former European Central Bank chief will now have to go back to Parliament to hold a vote of confidence in the government itself.

Bond yields rise

Draghi has been in power since February 2021 and has led a government formed by several parties and technocrats with the aim of bringing stability to the southern European nation, which is often thrown into fresh rounds of political chaos.

Draghi has consistently pushed for a reformist agenda and his work has softened previous concerns among investors regarding the stability of Italy’s economy. But this new setback risks efforts to secure post-pandemic funds from the EU and also comes as Europe pushes hard to ween itself off Russian hydrocarbons.

Italy is due to have parliamentary elections before June 2023, but the latest uncertainty in Rome could bring that forward.

Draghi, despite still having a majority in the Italian Parliament without the support of the Five Star Movement, has previously said he would not be available to lead another executive.

Italian bond yields pushed higher during the session ahead of Draghi’s announcement and Italy’s FTSE MIB shed 3.3% by the market close, with banking stocks taking a tumble.