Italy Heads to New Vote With Europe as Campaign Faultline

(Bloomberg) -- Italian President Sergio Mattarella asked economist Carlo Cottarelli to form a government with new elections due as early as the fall, as populist leaders railed against the president and the European Union for blocking their bid for power.

Cottarelli, 63, a former executive director of the International Monetary Fund, pledged Italy would stay in the euro and called for “a constructive dialogue” with the EU, in comments to reporters Monday. “The president has asked me to go before parliament with a program that will bring the country to new elections,” he said.

Italy's ‘Mr Scissors' Cottarelli Thrust Into Anti-Populist Role

The former IMF official said that he would plan for general elections after August if his government loses parliamentary votes of confidence, or in early 2019 if it wins the ballots in the lower house and in the Senate.

The choice of Cottarelli, known for his strict approach to state finances, is set to further inflame Italy's bitter political divisions after populist leaders slammed the president for the collapse of their planned government and sought to extend the blame to the European Union.

Acrimonious Campaigning

Markets gave up earlier gains as the Five Star Movement and the League raged against Mattarella, suggesting months of acrimonious political campaigning ahead. The populists said Mattarella gave in to pressures from investors and countries such as Germany when he decided to veto their decision to appoint the euroskeptic economist Paolo Savona as finance minister.

Both the anti-establishment Five Star and the anti-immigrant League rejected Cottarelli even before he was given a mandate. Five Star said it was considering proposing Mattarella's impeachment, while the League's Matteo Salvini called for elections “as soon as possible.”

The president chose EU rules over the votes of Italians and that's “an issue for democracy,” Salvini said in a message on Facebook. Either EU rules change or it makes no sense for Italy to remain a member of the bloc, he said.

‘Too Angry'

Asked if he would ally himself with Five Star in a new election campaign, Salvini told reporters he was “still too angry” to discuss this. Salvini's League fought the last campaign as part of a center-right alliance, with ex-premier Silvio Berlusconi's Forza Italia party as his main partner. Berlusconi, 81, could now run for office after a Milan court earlier this month lifted a ban imposed following a 2013 tax-fraud conviction.

The euro initially rallied against the dollar at the end of a day of drama on Sunday that saw the prospect of a populist government determined to take on Europe recede for now. It later gave up those gains to trade little changed as of 1:26 p.m. in Rome. The spread between Italian and German 10-year bonds reached the widest in over four years as polls suggest the populists can only benefit from the chaos.

“Mattarella's choice delays risk but may lead to stronger populist sentiment at the next elections, which is worrisome,” said Rosamaria Bitetti, lecturer in public policy at Rome's Luiss University. “People voted for these parties and it may be hard to explain to them why they can't have their government.”

Germany adopted a wait-and-see attitude. “The government hopes, in the interests of our close European partner Italy, for a stable government,” Chancellor Angela Merkel's chief spokesman Steffen Seibert told reporters in Berlin.

Nicknamed “Mr Scissors” for his strict approach to state finances, Cottarelli refused the official car he was entitled to when he was appointed commissioner for a review of public spending in 2013 under then-premier Enrico Letta. He has headed the Observatory on Italian Public Accounts at Milan's Catholic University since October.

To contact the reporter on this story: John Follain in Rome at jfollain2@bloomberg.net

To contact the editors responsible for this story: Alan Crawford at acrawford6@bloomberg.net, Alessandra Migliaccio, Kevin Costelloe