Italian President Sergio Mattarella has rejected a resignation offer from Prime Minister Mario Draghi in a bid to break a political impasse that has unsettled financial markets.
The head of state invited Mr Draghi to address Parliament, a statement from Mr Mattarella’s office said, to test the state of his coalition, after the second-biggest party in the alliance boycotted a confidence vote earlier on Thursday.
Mr Draghi offered to resign after the Five Star Movement, a group that has been a vocal critic of his government, stayed away from the Senate ballot.
Italian bond futures plunged during the day and the euro dipped back below parity with the US dollar after the news.
September futures on 10-year Italian government debt fell below 122, the lowest since June and below their 21-day moving average.
Mr Mattarella could ask the former head of the European Central Bank to seek support from all allies in a new vote.
A collapse of the coalition could prompt an early election, possibly in the autumn, but several parties would prefer to avoid this.
Italy’s political turmoil comes as Europe grapples with an energy crunch caused by Russia curtailing gas exports amid its war in Ukraine, stoking fears of a recession. The European Union, whose industries are heavily dependent on Russian gas, cut its growth forecast for 2023 in new projections.
Mr Draghi's exit could throw in doubt the country’s reforms needed to benefit from EU recovery funding, the administration’s strong pro-European stance and its staunch backing for military shipments to Ukraine.
The political turbulence has “concerned and surprised” EU officials, Economy Commissioner Paolo Gentiloni said.
“Stability is a value in itself,” Mr Gentiloni, himself a former Italian prime minister, said in Brussels, as he described the “troubled waters” facing the bloc, such as war, high inflation, energy risks and geopolitical tension.
Mr Draghi’s intention to resign was prompted by former prime minister Giuseppe Conte’s decision to walk out from a confidence vote in the Senate on Thursday on an aid package for businesses and households hit by high energy prices.
It remains to be seen if Mr Mattarella will be able to patch Mr Draghi’s broad but divided coalition back together.
Mr Conte’s Five Star Movement is the second biggest group in Parliament but has struggled to regain visibility after falling in the polls. It had been complaining for weeks that the government wasn’t doing enough to shield families from the crisis.
Matteo Salvini, leader of the League, which is the largest party in the coalition, has called for a snap vote.
All the other parties in Mr Draghi’s alliance, including the centre-left Democratic Party, want the prime minister to verify support for the coalition.