In Rome, the fate of Prime Minister Mario Draghi’s government hangs by a thread. If it tears, the European currency union could get sucked into the downward spiral. In addition, the European Central Bank (ECB) is in a dilemma between fighting inflation and supporting the economy.

The water levels of the Pos, Italy’s longest river, are dangerously low after months of lack of rain, and water consumption in neighboring communities is being rationed. In the northern part of the country, a state of emergency was declared due to the drought, while a political state of emergency prevailed in the Italian capital – with shock waves that shook the euro area.

Under the hot sun of Rome, the rationality and sense of responsibility of many people’s representatives there have dried up to a frightening degree. The “Frankfurter Allgemeine Zeitung” collected judgments from observers about the summer theater of the past few days in the Roman government district such as “complete chaos”, “absurd confusion” or “ultimate madness”.

The third-largest economy in the EU is allowing itself a farcical government crisis in the style of the commedia dell’arte, which could further weaken the already inflation-plagued euro. The specter of a Euro 2.0 crisis is looming, in which Mario Draghi, once the head of the European Central Bank (ECB) and defender of the common currency, is now threatening to become a tragic figure after a year and a half in government as the popular but failed Italian Prime Minister.

Draghi is currently the only possible guarantor of political stability, not only in Italy itself, where around 1,000 mayors and a number of business and professional associations have spoken out in favor of him continuing, although he wanted to give up. The aging President Sergio Mattarella, himself originally tired of office, but sentenced to stay at the beginning of the year due to a lack of alternatives, initially rejected Draghi’s resignation request. After a call for national unity in the Italian Senate on Wednesday, the head of government wanted to try again to rally as broad a coalition as possible behind him – but he didn’t even know whether he would survive a vote of confidence in the evening.

The international financial markets are watching the staggering of the prime minister with eagle eyes. The CSU finance expert in the European Parliament, Markus Ferber, observed: “Mario Draghi is perceived by the financial markets as an anchor of stability. If this factor disappears, it will have a negative impact on Italian refinancing costs.”

Italy’s chronically high level of debt is not even the main problem, adds Rasmus Andresen, leader of the German Greens in the European Parliament. Rather, there is a risk that confidence in the country’s economic performance will fall if “instability prevails for months” without Draghi. Andresen warns of a new currency crisis: “If Italy tips over, the euro will wobble.”

The consequence of the uncertainty that has already set in is that it is becoming more difficult for Italy to service its debts. The conditions for their refinancing through government bonds are deteriorating compared to other economies in the euro area, such as Germany. This growing yield gap for bonds, the so-called spread, was one of the symptoms of the European debt crisis a decade ago: the higher this figure, the worse the creditworthiness.

During the crisis at the time, Draghi, as head of the ECB, secured the financial markets’ respect for the euro zone’s willingness to defend itself against speculative attacks on the common currency with a courageous word (“no matter what the cost”). If necessary, the Italian wanted to shoot around with a monetary “bazooka”.

Today, previous government partners are holding their guns to his temple: the highly divided left-wing populists of the Five Star Movement, who withdrew his parliamentary support, as well as right-wing comrades-in-arms in his national unity government. In the background, the EU-sceptical far-right are lurking for a new election in October, which could make them the strongest political force.

Under Draghi’s successor Christine Lagarde, the European Central Bank has so far not come up with pithy words and deeds in view of record inflation rates and the weakness of the euro against the dollar, but rather with appeasement formulas. While the US Federal Reserve initiated a turnaround in interest rates, the mantra remained in Frankfurt: inflation will take care of itself.

A new plan by the ECB to intervene in spread dynamics and a key interest rate hike are now expected for Thursday – the first in over a decade. It is disputed how much the currency watchdogs should reach out. CSU man Ferber, economic policy spokesman for the conservative group of the European People’s Party (EPP) in the EU Parliament, demands: “Christine Lagarde must now step on the monetary policy accelerator pedal.” An interest rate increase of only a quarter of a percentage point would be “a disappointment” for him. At the same time, the expert warns against a new purchase program by the ECB to support government bonds, which it has just discontinued.

Green Andresen, on the other hand, fears that too large a rate hike by the ECB would have a crippling effect on the economy. He warns: “Even the smallest interest rate corrections can trigger major economic alarms. The ECB should therefore act very prudently.” Lagarde is under great political pressure, and there have been open disputes in the central bank’s management bodies for weeks.

The SPD MEP Joachim Schuster praises the head of the ECB: “I support Ms. Lagarde’s policy of weighing things up.” Too much is expected of her. “The ECB is overwhelmed when it has to fight the crises alone.” For example, the EU must try together to combat the high energy costs, whether through price caps or “skimming off special profits”. The ECB’s dilemma is that it has no influence whatsoever on the key factors of the current inflation: “Rising interest rates will not solve the energy shortage.”

Across the euro area, the zero interest rate policy of the past few years has made savers poorer, but it has helped governments to service their debts. Strong countermeasures in the fight against inflation – actually one of the main tasks of the Frankfurt monetary authorities – could put an additional damper on economic growth in free Europe, which is suffering from the pandemic and the Ukraine invasion. Both crises, Corona and Russian aggression, have meant that not only the national states went into debt, but also the EU as a whole for the first time. In addition, the European Union is facing further major uncertainties in the light of the energy crisis that is just beginning, triggered by Russian President Vladimir Putin’s war of aggression in Ukraine.

So the ECB already has enough problems that challenge Lagarde’s energy, which has not yet been recognizable to everyone, to which Ferber remarks smugly: “For months, the European Central Bank has been conspicuous for its busy doing nothing.” And now Rome, the scene of the crisis, too. “Italy is the Achilles heel of the ECB strategy. Without a stable government team in Rome, it will be difficult for Frankfurt to do everything in its power to combat inflation,” warned the Belgian daily De Standaard.