Italy Scrambles to Form New Government With Deadline Looming

Written by
Chiara Albanese
Written by

Chiara Albanese

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(Bloomberg) --

Talks aimed at building support for a new Italian government pushed ahead with a deadline in sight, after consultations failed to produce a deal to end the deadlock that forced Prime Minister Giuseppe Conte to resign.

Roberto Fico, the lower-house speaker tasked with sounding out parties, said Sunday afternoon that discussions with the forces from the outgoing coalition would resume the following day. He has until Tuesday to report back to President Sergio Mattarella.

The range of possible solutions is narrowing, with the most likely outcomes a new cabinet led by Conte but with some new ministers, or a new government led by an institutional figure.

Italy's benchmark BTP bonds continue to price in a resolution to the current political drama, with the 10-year yield trading at its lowest level in almost two weeks.

Ex-Premier Matteo Renzi, who's at the center of the impasse, would back former European Central Bank Governor Mario Draghi as prime minister, Italian newspapers have reported. Mattarella has not discussed this possibility with Draghi, according to an official close to the president, who asked not to be identified.

“We will not accept an end to the crisis without a solemn, written commitment on the issues,” Renzi, whose tiny Italy Alive party quit Conte's administration last month, said in an interview with Corriere della Sera Sunday.

Economic Clash

The departure of Renzi left the government without a parliamentary majority and prompted Conte's resignation. Renzi pulled out over disagreements over how to spend 209 billion euros ($252 billion) in European Union recovery funds aimed at easing the economic fallout from the coronavirus pandemic, which has been particularly grim in Italy.

While his party represents only 3% of total votes, Renzi's support to a government is crucial for reaching a majority in parliament.

“Italy seems distracted,” EU Parliament head David Sassoli said in an interview with La Stampa Monday. “The success of the recovery plan depends on the responsibility and stability of each member state.”

Renzi may also push for Finance Minister Roberto Gualtieri to be replaced as part of his push to have more say in the country's finances, according to people familiar with the talks.

A new administration would need the support of the Democratic Party and the Five Star Movement, the biggest stakeholders in the outgoing coalition. Both parties have signaled they'd be open to a new alliance with Renzi if Conte remains as premier. According to party officials, a written commitment from the parties could resolve the conflict.

Center of Outbreak

Conte, a 56-year-old lawyer, resigned on Jan. 26, days after Renzi's departure, plunging the country into political uncertainty as it battles the pandemic and a deep recession.

Italy was initially the center of the Covid-19 outbreak in Europe and has suffered more than 88,000 deaths from the virus. Restrictions aimed at curtailing the spread led the economy to contract more than 9% last year, according the International Monetary Fund.

In a rare bright spot for the economy, manufacturing is picking up at the fastest pace in nearly three years. Factories, mostly in the north, saw a sustained upturn in output in January, with orders expanding at a solid pace thanks to demand from Europe and North America, according to an IHS Markit survey.

For Conte , the current crisis marks the second time he has seen his coalition unravel. The first came when Matteo Salvini of the anti-migrant League abandoned his first administration in 2019.

If Conte can maneuver a comeback, it would be his third stint as premier since the last general elections in the country in 2018. Salvini and his allies on the right have been pushing for new elections in the hope they could unseat the Democrats and Five Star.

According to a poll published by Corriere della Sera on Sunday, about 40% of Italians would be in favor of a new government led by Conte, but 36% would prefer a different leader. Only 28% of those polled see a new election as the best outcome.