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Italy’s Government Set to Collapse as Parties Ditch Draghi

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(Bloomberg) -- Italian Prime Minister Mario Draghi appeared set to fall after three key parties failed to support him in a confidence vote.

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Draghi’s resignation would plunge the country into months of political turmoil just as economic warning signs start to flash. While President Sergio Mattarella may still attempt to forge a majority in parliament for a fresh government, the most likely outcome is snap elections in the fall.

The premier won a confidence vote late Wednesday with 95 senators voting in favor, and 28 against. But the ballot had little significance as the center-right League and Forza Italia, as well as the Five Star Movement, did not take part.

Draghi first offered to quit last week when the Five Star Movement, a key coalition partner, last week boycotted another confidence vote in his government. The premier said that there was no longer the broad support needed to govern and struck a defiant tone in parliament Wednesday, asking parties to back his reforms and chiding them for the infighting that slowed his administration’s action in the past few months.

In a heated debate in Rome’s Senate, Matteo Salvini’s League and Silvio Berlusconi’s Forza Italia had asked Draghi to ditch Five Star as a governing partner and to lead a “deeply renewed” cabinet. The 74-year-old Draghi, a former chief of the European Central Bank, refused compromise attempts by political leaders.

Italian stock and bond futures fell on the prospect that Draghi’s government could fall. Futures contracts on the FTSE MIB Index fell 4% while bond futures touched a three-week low. The euro slipped against the dollar.

Draghi, an unelected technocrat, was picked for the premiership early last year after parties failed to agree on a political appointee.

Paolo Gentiloni, the European Union’s economy commissioner, warned “a perfect storm” could lie ahead for Italy.

The new bout of political turmoil comes at a complex juncture for the euro area, amid growing concerns about a looming recession, even though the Italian economy has been faring better than its peers. Early elections would also hamper deliberations over Italy’s 2023 budget, a process that usually dominates parliamentary proceedings during the autumn.

While Draghi will technically remain premier until elections, possibly on Oct. 2, his ambitious plan to reboot the country is unlikely to progress anytime soon and markets will be roiled by the news.

During his 18 months in power, Draghi devised a plan of reforms agreed with the European Union to free up Italy from red tape and boost competition. That was instrumental for the country to receive EU recovery funds.

It will now fall to President Sergio Mattarella to decide whether to call for a new vote or appoint a caretaker government, though that’s widely-viewed as unlikely. If the head of state opts for new elections as expected, they must be held within 70 days.

(Updates with outcome of confidence vote from first paragraph)

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