Week Ahead (25 July)

W/C Monday, 25 July – Italy enters a period of political uncertainty after Italian President Mattarella dissolves Parliament, calling early elections

Italian President Sergio Mattarella dissolved parliament last Thursday after Prime Minister Mario Draghi resigned for the second time within a week. The next Italian general election has been scheduled for 25 September.

Draghi faced a confidence vote on Wednesday, after Silvio Berlusconi’s Forza Italia and Matteo Salvini’s right-wing Lega withdrew their support for his coalition, joining the Five Star Movement (M5S). M5S had refused to back Draghi on a bill to support Italian citizens through the cost-of-living crisis; its leader, former Prime Minister Giuseppe Conte, claimed that the €26 billion package proposed was not enough, prompting Draghi’s first resignation last week. While Draghi won Wednesday’s vote, the failure of the three coalition parties to back him prompted him to resign for a second time.

The political instability affecting the Eurozone’s third largest economy comes at a particularly inopportune time as the country battles soaring inflation and an energy crisis, and could jeopardise the progress made by Italy on its National Recovery and Resilience Plan (NRRP).

Fratelli D’Italia, led by Georgia Meloni, is currently leading the polls and looks well placed to form a coalition with fellow anti-immigration right-wing party Lega and Berlusconi’s Forza Italia. Should Meloni’s party take power there will be important implications for Europe; Fratelli D'Italia is a Eurosceptic party which has pledged to "rediscuss" the Eurozone and some European treaties.

Monday, 25 July - Sunak and Truss face off in televised debate before Conservative Party leadership election

The final two candidates for the leadership of the Conservative Party, former Chancellor of the Exchequer, Rishi Sunak and the Foreign Secretary, Liz Truss, will go head-to-head in a televised debate on Monday. Whoever prevails in the leadership contest will become the new UK Prime Minister and will be expected to lead the Conservative Party into the next general election, which must take place no later than 25 January 2025.

Polling suggests that among the wider party membership Liz Truss enjoys greater support than the former Chancellor. A YouGov poll published on Thursday revealed that the Foreign Secretary would take 62% of the vote compared to 38% for Sunak, a 24% lead.

With a final vote on the new leader not expected until 5 September, the Conservatives are facing into a long and fractious summer where party grievances and splits on policy will be aired publicly. Truss is campaigning on a tax-cutting platform, including cuts to corporation taxes, and has flagged her intention to examine the Bank of England's mandate for setting interest rates. Sunak, meanwhile, has said that the tax increases he brought in when Chancellor would remain and has described tackling inflation as his priority.

Drawing the party together again following the leadership contest may be a difficult task, and any disunity is likely to be seized upon by the Labour opposition with calls for a new general election.

Tuesday, 26 July - Extraordinary meeting of Energy Council to discuss 15% reduction in gas usage amid fierce opposition from several member states

On Tuesday, an extraordinary Transport, Telecommunications and Energy Council will take place to discuss the European Commission’s package of measures to enhance the bloc’s energy security ahead of next winter. The package proposes a mechanism that could allow the Commission to declare a mandatory gas consumption cut, with targets of reducing gas demand by 15% between 31 August and 31 March 2023 being introduced. This cut could be triggered whenever scarce supplies make sharing gas necessary among member states.

The proposal has already caused a backlash among EU member states, with the energy ministers of Cyprus, Greece, Poland, Portugal, and Spain condemning the plan, which is largely conceived as an emergency measure to save Germany in case of a Russian gas shut-off. Germany and countries of the north such Denmark, the Netherlands, and Luxembourg will appeal to the need to demonstrate solidarity at an EU level. However, the leaderships of member states less dependent on Russian gas are not willing to bear the political costs of such measures, which could result in additional strains on their domestic economies. The prospects of the currently proposed legislation are in serious doubt, as a qualified majority of 15 countries representing 65% of the EU’s population is required for its approval.

Friday, 29 July – Eurostat to publish flash inflation figures for July in aftermath of ECB decision to raise rates by 0.5 percentage points

On Friday, Eurostat will publish its flash inflation figures for July – two days after the interest rate rises announced by the ECB last Thursday take effect. Last Thursday's rate increase marked the third time in the ECB’s history that it has raised rates in the midst of an economic crisis. On the previous two occasions it also raised rates in July and in both instances the rate hikes were reversed within months. The ECB survey of professional forecasters released its own inflation data today suggesting that for 2022, 2023 and 2024, inflation will be at 7.3%, 3.6% and 2.1% respectively, 1.3, 1.2 and 0.2 percentage points higher compared with the previous survey round.

Last week's meeting was billed as Christine Lagarde’s “whatever it takes” moment, almost 10 years to the day after Mario Draghi gave his famous speech in London. Even before the resignation of Mario Draghi as Prime Minister of Italy, Lagarde was under pressure to deliver an anti-fragmentation tool aimed at capping borrowing costs for the eurozone’s most indebted states, while also getting to grips with record inflation.

The outcome of these deliberations was the transmission protection instrument (TPI). The TPI enables the ECB to make secondary market purchases of securities issued in jurisdictions experiencing a deterioration in financing conditions, provided four conditions are met. While TPI does not appear to constitute the “whatever it takes” tool that some had anticipated, and PEPP reinvestments continue to be the first line of defence, it does provide another line of attack for the ECB to control spreads and also demonstrates the capacity of ECB staff to work swiftly to counteract a deterioration in financing conditions for Eurozone member states.