Italy heads for populist government after months of stalemate

Italy heads for populist government after months of stalemate

Mattarella summoned Carlo Cottarelli after the anti-establishment Five Star and far-right League parties abandoned plans to form a coalition, angered by the president's veto of their choice of a eurosceptic to become economy minister.

Mr Salvini also warned former Italian prime minister Silvio Berlusconi against allowing his Forza Italia party, which the League joined forces with before March's elections, to back the technocratic government.

Anti-establishment 5-Star Movement (M5S) leader Luigi Di Maio and anti-migrant Euroskeptic League leader Matteo Salvini on Thursday agreed to form a new government with law professor Giuseppe Conte as premier.

Mr Conte previously quit as PM designate because the president wouldn't accept an anti-euro candidate for economy minister.

While Five Star support has dipped, the League has surged into second place in polls, strengthening Salvini's hand in any subsequent coalition negotiations.

The prospect of a populist government running Italy had already caused turmoil in financial markets, over fear that the coalition would unleash a spending splurge and increase Italy's massive debt mountain - the equivalent of more than 1.3 times the nation's domestic output.

Giuseppe Conte addresses a press conference after meeting with Italian President Sergio Mattarella in Rome, Italy, on May 31, 2018. None of the parties obtained the majority required to form the government.

"In the absence of confidence, the government would resign immediately and its main function would be the management of ordinary affairs until elections are held after the month of August", said Cottarelli.

The premier-designate tapped at the beginning of the week to head an interim government of technocrats has stepped aside.

The uncertainty in the country and the fear that the Five Star Movement and the eurosceptic League could win even more votes if a fresh vote is held appeared to spook the financial markets.

President mattarella said he could not appoint the eurosceptic paolo savona to the post, citing concern from investors at home and overseas, and tasked prime minister cottarelli with forming a government instead.

Wednesday afternoon, 5-Star leader Luigi Di Maio met informally with Mattarella, followed by Cottarelli.

They presented their proposed cabinet over the weekend, but President Sergio Mattarella vetoed their economy minister, collapsing the deal.

Conte had been expected to teach at Florence University on Friday morning, but with signals that the 5-Stars and League might get another shot at forming a government, he grabbed a train for Rome.

Italian stocks were trading higher as signs emerged of a compromise to avoid snap elections that could be dominated by the issue of euro membership, calming investors. Di Maio's and Salvini's electoral victories were a shock, but they were the product of widespread apathy and disaffection among Italian voters. The Italy-Germany 10-year spread reached the widest since 2014 last week on prospects of a Five Star/League government, and widened further Monday as Cottarelli prepared to meet Mattarella.

Elections could benefit Salvini, however, as recent polling by IndexResearch put the League at 22%, five points up from its vote share in the March 4 ballot.

U.S. futures are trading flat ahead of the open on Thursday, with Europe mostly a little higher as negotiations continue to avoid another election in Italy.

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