Brussels Playbook: Italy crisis — ECB decision day — Nord Stream deadline

 

Brussels Playbook: Italy crisis — ECB decision day — Nord Stream deadline

BY SUZANNE LYNCH

July 21, 2022 7:10 am

https://www.politico.eu/newsletter/brussels-playbook/italy-crisis-ecb-decision-day-nord-stream-deadline/

 

POLITICO Brussels Playbook

By SUZANNE LYNCH

with ZOYA SHEFTALOVICH

 

 

PERFECT STORM: Italy has plunged into political crisis after three parties in the governing coalition failed to give Prime Minister Mario Draghi their backing, leaving the government on the brink of collapse.

 

That’s not all: The crisis in Rome comes as the European Central Bank gathers for a crucial meeting this afternoon, when it is expected to announce the first interest rate rise in more than a decade and unveil a new “anti-fragmentation” tool designed to deal exactly with a scenario that now seems more likely: rising Italian bond yields.

 

But wait, there’s more: Oh, and to really cheer you up on this Belgian national holiday, Russia could decide to cut off gas supplies through the Nord Stream gas pipeline today, when the flow of gas is due to restart after scheduled maintenance. Happy public holiday Thursday! Playbook will break things down …

 

ITALY IN CRISIS 

DRAGHI ON THE BRINK: Mario Draghi is expected to submit his resignation today — for a second time — after the 5Star Movement, Silvia Berlusconi’s Forza Italia and Matteo Salvini’s rightwing League removed their support from the national unity government he was appointed to lead 17 months ago.

 

Gamble backfires: On Wednesday in a speech to parliament, Draghi had said he was prepared to lead the government, challenging the ruling parties to meet the moment. But following an acrimonious debate in the chamber, the two right-wing parties boycotted a vote of confidence. Draghi is expected to announce his decision to resign at 9 a.m., according to Italian news agency Ansa. POLITICO’s Hannah Roberts reports has the details.

 

Election looms: The unraveling of Draghi’s government brings the prospect of an early election closer, most likely in September or October. More importantly, it has plunged Italy into political instability at a highly volatile moment for the European economy, which is battling soaring inflation and an energy crisis, and facing possible recessionary signs.

 

ALL EYES ON FRANKFURT — AND THE MARKETS: The ECB’s rate-setting decision will be announced just after lunchtime today, but the Governing Council will first reconvene at 9:30 a.m. No prizes for guessing what will be on the agenda. Decision-makers will be watching the reaction of markets to the expected collapse of the Italian government, with stock and bond futures already dropping last night on the news from Rome.

 

What we do know: The ECB will raise interest rates today — the question is by how much. Eurozone government bonds fell during the day on Wednesday partly on speculation that the bank could raise the benchmark interest rate by half a percentage point, rather than the 25 basis point signalled by its own guidance.

 

It follows intense internal debate in recent months about how far the bank should go to rein in inflation, which is now running at four times its target, with the central bankers of Lithuania and Latvia among those to publicly call for a larger rate hike as their countries battle soaring price increases. The ECB has been slower to act than other central banks, resisting calls to follow the Federal Reserve and the Bank of England and ramp up interest rates.

 

ITALIAN QUESTION: But the other big policy announcement due today — details of the bank’s new “anti-fragmentation” instrument — will be even more closely watched, given the developments in Italy. The “transmission protection mechanism” aims to address the widening spread between the bonds of countries like Italy and the debt of eurozone members like Germany.

 

Concerns about the health of the Italian economy — and its debt level of around 150 percent of GDP — had already been running high. The yield on 10-year Italian bonds hit 4 percent last month — the highest level since 2014. But deciding to shore up Italian bonds is a politically toxic issue: Countries including Germany are loath to consider anything that could be seen as monetary financing, a principle prohibited under the EU treaties.

 

Lagarde’s big moment: Today could be a pivotal moment for Christine Lagarde, who succeeded Draghi as the president of the ECB in 2019. The former IMF chief and French finance minister, who is not an economist herself, is known to rely heavily on the bank’s Chief Economist Philip Lane, who has taken a more dovish stance on the current economic challenges and the risks posed by the inflationary climate. In something of an irony, the paths of Lagarde and Draghi have become intertwined, culminating in today’s crunch decision.

 

Brussels comment: A European Commission spokesman last night repeated the EU’s line from last week, when the Italian crisis first reared its head, saying: “The Commission never comments on political developments in member states.” President Ursula von der Leyen “has repeatedly emphasized the close and constructive cooperation with Prime Minister Mario Draghi,” the spokesman added. “She looks forward to continued cooperation with the Italian authorities on all EU policies and priorities.” But behind the scenes, the imminent departure of Draghi, who was widely seen as a stabilizing force within the Italian political scene, is causing panic in Brussels.

 

NOW READ THIS: POLITICO’s Johanna Treeck has a top read on the national nepotism within the ECB. Unpublished research by the ECB staff committee, seen by Johanna, shows that there are 24 nationality “clusters” in 17 of the ECB’s 25 departments. Most clusters are either German or Italian. Worth your time.

 

NORD STREAM D-DAY 

DEADLINE LOOMS: Also today, the Nord Stream gas pipeline is due to come back online, after being shut down for scheduled maintenance. Russian President Vladimir Putin hinted Wednesday that supply would recommence through the pipeline linking Russia and Germany — but flows could be curtailed.

 

Kremlin threats: In comments in Tehran, Putin said gas would only flow if a turbine currently under maintenance in Canada was returned. Ursula von der Leyen noted the part was already in transit, so there was no “pretext” for a cut.

 

White smoke: As our colleague America Hernandez reports, day-ahead data on platforms used by gas market traders show that enough space has been booked to carry around 50 million cubic meters (mcm) of Russian gas today from Nord Stream further inland via two downstream gas links — the NEL and OPAL pipelines — an indication that gas flows will resume this morning.

 

But anxiety is high ahead of today’s moment of truth. Earlier this week, the IMF warned Germany could lose almost 5 percent in economic output if Russia cut off gas supplies to the country.

 

Cutting demand: Meanwhile, the European Commission unveiled its much-anticipated winter energy proposal on Wednesday, proposing a voluntary 15 percent cut in consumption, which could become a binding target after eight months. Countries are expected to present proposals in September.

 

Next step: Ambassadors will again consider the communiqué on Friday ahead of next week’s Energy Council, with several countries opposed to the plan. America Hernandez has the details here.

 

UK CALL: The U.K. government should “urgently” strike an agreement with the EU to cooperate on emergency energy supplies in case Russia cuts off the gas, the House of Lords economic affairs committee said in a report published today. The FT has a write-up.

 

OPNION — TIME FOR IRAN PLAN B: If the West continues to cling to the idea that negotiations with Tehran will lead to resolution, it’ll be sleepwalking as it did with Russia, argue MEP Nicola Beer and professor Peter R. Neumann in this op-ed for POLITICO.

 

RUSSIAN EXPANSIONISM: Meanwhile, Russia gave its most defiant message yet that its game plan is to annex parts of Ukraine. “The geography is different now,” Foreign Minister Sergey Lavrov said on Wednesday. “It’s not just Donetsk and Luhansk, it’s Kherson, Zaporizhzhia, and a number of other territories. And this is an ongoing process, consistent and insistent.” POLITICO’s Wilhelmine Preussen has the write-up of his comments here.

 

Putin health rumors update: Putin is “entirely too healthy,” CIA Director William Burns said Wednesday, throwing cold water on constant rumors that the Russian president is ill.

 

About that ‘no limits’ friendship: China’s ambassador to the U.S. on Wednesday attempted to walk back his country’s declaration of a “no limits” partnership with Russia, suggesting there’s been a “misunderstanding.” More here.

 

RUSSIAN SANCTIONS BUSTING: Days after the EU banned Kremlin-backed news outlet RT for its role in spreading propaganda about the war in Ukraine, the Russian media organization was back in the game, POLITICO’s Mark Scott reports. Here’s how they did it.

 

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POLISH VERDICT: The European Parliament’s Committee on Budgetary Control concluded its “fact-finding” mission to Poland on Wednesday, our colleague Wilhelmine Preussen reports. After three days of meetings with politicians, judges, representatives of civil society and journalists, the head of the delegation Monika Hohlmeier (EPP) said the group had concluded there are “systematic problems” (caused by the Polish government) that have held up the disbursement of EU funds.

 

Bad news, good news: The nine-strong delegation from a range of political groups didn’t hold back, criticizing the lack of transparency and continuous breaches of the rule of law. But it was not all bad news. The MEPs agreed on one thing: Poland’s efforts to support Ukrainian refugees is praiseworthy.

 

BELGIUM-IRAN TREATY UPDATE: Belgian MPs overnight ratified a controversial treaty with Iran that could allow an Iranian convicted of terrorism in Belgium to be sent back to Tehran, reports POLITICO’s Camille Gijs.

 

MIGRANT KIDS IN BELGIUM: The Belgian government on Wednesday formally signed off on the funding for a new center for unaccompanied migrant children, Camille writes in to report. Last Friday, Doctors Without Borders shut a Brussels center because of a lack of funds, and called on Belgian authorities to take over and work on a long-term solution for the rising number of migrant children in Brussels streets. According to Julien Buha Collette, head of mission at MSF Belgium, the government funding will be provided to other NGOs, though it is not clear when the new center will open and how much money will be provided. “This is only a first step, as the need for adapted structures for the youngest remains very important,” Buha Collette added.

 

BRITISH PM RACE: The race to succeed Boris Johnson as British prime minister has been whittled down to two candidates: Liz Truss and Rishi Sunak. The Conservative Party grassroots members (representing a minuscule proportion of the British electorate) are now due to choose the winner in early September. Truss is currently the favorite to win — POLITICO’s Annabelle Dickson and Emilio Casalicchio have a must-read profile of the foreign secretary.

 

NI update: Meanwhile, Johnson’s final Prime Minister’s Questions coincided with the controversial Northern Ireland Protocol Bill passing the Commons — a good day to bury bad news, one could say.