Italy Falls Into Political Chaos as Populists Slam President

(Bloomberg) -- Italy sank deeper into political turmoil as populist leaders pulled the plug on their attempt to form a government after the president rejected the choice of a euro-skeptic, Germany-bashing candidate as finance minister.

The anti-establishment Five Star Movement said it was considering proposing impeachment of President Sergio Mattarella after his veto, while anti-immigrant League leader Matteo Salvini hinted at a conspiracy and made a thinly veiled call for fresh elections. A new vote could be held on September 9, newspaper Corriere della Sera reported on Monday.

The euro rallied against the dollar at the end of a day of drama that saw the prospect of a populist government determined to take on Europe recede for now. But with new elections all-but certain and the anti-euro League gaining support, polls suggest the populists can only benefit from the chaos -- raising the threat of more market turbulence ahead.

Mattarella became the target of populist rage when he said he rejected the populists' choice of Paolo Savona for finance minister for the good of the country and the financial “savings of families” that had been endangered by rising bond spreads and market concerns. Under the constitution, Mattarella names both the premier and ministers -- the latter at the premier's suggestion.

‘What's the Point?'

Both Salvini and Five Star leader Luigi Di Maio reacted furiously to the president's intervention on Sunday evening, with Di Maio blaming credit-rating companies for torpedoing the cabinet.

“Let's be clear then, what's the point of going to vote since governments are decided by the credit-rating agencies and the financial lobbies,” Di Maio said on his Facebook page. On Friday, Moody's put Italy's credit rating on review for a possible downgrade citing risks to its fiscal strength from the government plan put forward by Di Maio and Salvini.

Mattarella summoned Carlo Cottarelli, a former executive director of the International Monetary Fund, to his office on Monday. Cottarelli may be asked to try to form an interim government before the country heads to early elections.

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.

In an interview with Bloomberg Television's Francine Lacqua on May 17, Cottarelli praised the populist program's proposals on fighting bureaucracy and corruption, and speeding up legal proceedings for civil justice. But he said other aspects were “quite worrisome,” like the idea that “if Italy has to grow more it probably needs higher deficit and that is going to be conflicting with the European rules as our deficit is supposed to decline, not just stay at the current level.”

“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.”

The euro strengthened 0.6 percent against the dollar, buying $1.1718 at 8:22 a.m. in Rome. The common currency had dropped for six straight weeks amid the political uncertainty.

Heightened Uncertainty

“We may now be in for an extended period of heightened uncertainty ahead of fresh elections -- assuming that's where we're headed -- but that's not a story for today,” said Ray Attrill, head of foreign-exchange strategy at National Australia Bank Ltd. in Sydney. “For now it's more relief that Italy will not -- for now at least -- have an avowed eurosceptic finance minister.”

Five Star leaders are discussing a possible attempt to seek Mattarella's impeachment, invoking a constitutional clause which says the president is not responsible for actions carried out as part of his office, except for high treason or for violating the constitution, a Five Star official said. Mattarella's office declined to comment on the report.

A government plan by the Five Star's Di Maio and Salvini of the League had spooked European Union partners and financial markets with pledges for fiscal expansion and tax cuts challenging EU budget rules. The Italy-Germany 10-year yield spread reached the widest since 2014 on Friday.

Both men have vowed to vote against a so-called technocratic or non-partisan government, if such a coalition comes to a confidence vote in parliament.

“I agreed to all the ministers except the finance minister,” Mattarella told reporters at the presidential palace in Rome. “I asked for a figure who would mean not risking an exit from the euro.” Mattarella added: “Now some political forces are asking me to hold elections. I will take decisions on the basis of how the situation evolves in parliament.”

Both Salvini and Di Maio had staunchly backed Savona, and pressed Mattarella regarding the proposed government team in separate meetings with the head of state earlier on Sunday afternoon.

“We worked for weeks, day and night, to ensure the birth of a government which defends the interests of Italian citizens. But someone (under pressure from whom?) said no to us,” Salvini wrote in a Facebook post. “At this point, with the honesty, coherence and courage of always, you must now have a say,” Salvini added in a call for early elections.

--With assistance from Liau Y-Sing and Ruth Carson.

To contact the reporters on this story: John Follain in Rome at jfollain2@bloomberg.net;Chiara Albanese in Rome at calbanese10@bloomberg.net

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