Italy’s political turmoil threatens EU

European markets stabilised on Wednesday morning as the "panic over Italy's political turmoil" began to subside, says Tom Rees in The Daily Telegraph. According to Reuters, the two populist parties "poised to seize control" the anti-establishment Five Star and far-right League are making renewed efforts to form a coalition to avoid new elections, and trying to come up with a new candidate for finance minister after their eurosceptic choice was rejected by President Mattarella.

The rejection of Paola Savona on Sunday scuppered the efforts of Giuseppe Conte, a little-known law professor, to form Italy's first populist government, says The Times. Mattarella then appointed the technocrat Carlo Cottarelli as prime minister to pull together a caretaker government prior to fresh elections, in the hope that Italians would come "to their senses" and return the political mainstream to power. Cottarelli has now put his plans on hold, reports the Financial Times.

Was Mattarella right?

Italy's establishment was initially hailed for its "courage and responsibility" for blocking the populists, but Europe's elites were soon "trembling" as fresh elections threaten to become a "referendum on popular sovereignty versus the European Union", says Bruno Waterfield in The Times. By blocking the coalition, Matterella reinforced a "deadly" message that "however you vote the politics of eurozone austerity will always win".

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

Matteo Salvini, leader of the League, came out fighting, telling voters that the next election would represent a "referendum" on whether Italy was "free" or "enslaved". According to a poll earlier this week, an electoral alliance between the two parties would result in a landslide victory.

It's a "good thing" that Mattarella acted as he did, says Beppe Severgnini in The New York Times. Leaving Savona's euroscepticism aside, the governmentwas "built on unrealistic promises". The coalition's plan for government which did not in fact call for Italy to leave the euro was crammed with programmes costing north of €100bn. The financial markets and the rest of Europe were convinced that this new government posed a "fundamental threat".

In reality, the agendas of the two parties are "quite different" and they are unlikely to stand together in new elections. The "real winners here are Italy's voters" who, thanks to their "coolheaded president", have a chance to "rethink their answers to a very important question": whether or not to set their country on a "collision course" with the EU.

Brussels must cut Italy some slack

Italy's populist leaders may "shake their fists at the widening spreads", as if they were the "very personification" of an establishment conspiracy, but markets are never "at the beck and call of the politicians", but rather the "self interest of millions of investors," says Jeremy Warner in The Daily Telegraph. What they see is "an environment about to turn entirely hostile to wealth preservation and growth". The populists may "reflect Italy's howl of despair", but they are not offering any solutions. Nor, on the face of it, is anyone else: the centrists are too "hopelessly divided" to form an alternative government.

To prevent the "impending car crash", the "eurozone high command" must cut Cottarelli "some slack" and loosen the "fiscal straitjacket". Precedent suggests that "this is indeed what the eurozone will do". Liberal elites have brought this on themselves by refusing to listen or reform. Italy's populists could now "drag the whole edifice with them" into a world of mass default. "Who knows what comes next, but the way things are going, Italy could be out of the EU before Britain."