Volkswacht Bodensee - Crunch time as Italy's Draghi faces parliament

There is much at stake: a government collapse could worsen social ills in a period of rampant inflation, delay the budget, threaten EU post-pandemic recovery funds and send jittery markets into a tailspin.

Polls suggest most Italians want Draghi, 74, to stay at the helm of the eurozone's third-largest economy until the scheduled general election in May next year.

But the former European Central Bank chief has vowed to do so only if the wildly disparate parties in his coalition pledge to behave responsibly.

Draghi will address the Senate Wednesday morning. He may say he simply no longer trusts the parties.

At that point, Italy's president could dissolve parliament and call elections for September or October.

But experts said Draghi would likely instead demand broad consensus to tackle Italy's most pressing issues: from a cost of living crisis and recession worries, to the rollout of key reforms and the Ukraine war.

His speech will be followed by a debate allowing each party to say where it stands.

Draghi will then face a confidence vote, considered a key step in undoing the damage done by the populist Five Star Movement's refusal last week to back him in a key vote.

If he survives all that, the process will be repeated in the lower house on Thursday.

- 'Last-ditch compromise?' -

Parties on the centre-left have said they will support Draghi, but a question mark remains over right-leaning Forza Italia and the League, which have ruled out staying in government with Five Star.

"We are in the middle of an Italian-style political crisis, so predictions change utterly from one second to the next," Giovanni Orsina, head of the Luiss School of Government in Rome, told AFP.

Five Star head Giuseppe Conte has demanded Draghi adopt the Movement's priorities, from a minimum wage to tax credits on energy-efficient home upgrades -- something he is unlikely to do.

The populist party may split before the vote, with Forza Italia and the League potentially agreeing to work with the breakaway element.

Once the largest party in parliament, the Five Star Movement has already seen scores of defections as it hews to its radical, anti-establishment side in a bid to reverse plummeting support in the polls.

At least 15 more of its MPs were set to quit should Five Star vote against Draghi, news agency AGI said.

"A last-ditch compromise cannot be entirely ruled out," Lorenzo Codogno, a former head economist at the Italian treasury, said in a note.

- 'Greater political uncertainty' -

But Fitch ratings agency warned the political crisis "heralds greater political uncertainty even if early elections are avoided", with "structural reform and fiscal consolidation likely to become more challenging".

Two-thirds of Italians believe Draghi should stay, according to a Euromedia poll published Tuesday. Nearly 2,000 mayors have signed a petition calling for him to remain PM.

Hundreds of people took part in pro-Draghi sit-ins on Monday, while on Tuesday Spanish President Pedro Sanchez penned an opinion piece in Politico titled "Europe needs leaders like Mario Draghi".

Anxious investors are also watching closely. Wednesday's vote comes a day before the European Central Bank unveils a tool to correct stress in bond markets for indebted eurozone members.

The tool is meant for countries like Italy -- but as Enrico Letta, head of the centre-left Democratic Party (PD) said Tuesday, "if we don't pull ourselves together, it will be harder to ask others to save us".

M.Furrer--BTB