Italy crisis: Potential prime minister fails to get support for stop-gap government as markets plunge

Elections likely to focus on relationship with European Union and eurozone

Italy's prime minister-designate, Carlo Cottarelli, meets with the country's president, Sergio Mattarella (EPA)

The man asked to be Italy‘s prime minister has failed to secure support from major political parties to form a stop-gap government, as the country’s political turmoil sent international financial markets plunging.

Carlo Cottarelli, a former International Monetary Fund (IMF) official, was asked to form a technocratic government after an attempt by two populist parties to form a government fell apart.

The president, who appoints the premier and ministers in Italy, opposed the populists’ choice of a eurosceptic economics minister.

Mr Cottarelli was supposed to submit his list of ministers to the president, Sergio Mattarella, on Tuesday, but he left the president’s office after about an hour without making a statement, unexpectedly delaying the formation of a government.

A spokesman for Mr Mattarella said Mr Cottarelli needed more time to work on the cabinet and the two would meet again Wednesday morning.

Carlo Cottarelli, an economist with experience at the International Monetary Fund (IMF), has been asked to form a technocrat government to plan for the polls (ANDREAS SOLARO/AFP/Getty Images)

Mr Cottarelli’s government, intended to see Italy through a period of uncertainty, could potentially be scuppered before it is even formed.

The populist parties, which got the most votes in an inconclusive election in March, have promised to vote against the government in a confidence vote, forcing Italy to hold new elections around the end of the year.

The anti-establishment Five Star Movement and anti-immigrant League responded to the president’s dismissal of their government by accusing him of betraying voters and calling for his impeachment.

The political uncertainty has stoked fears of instability in the euro bloc, causing stocks to fall in Asia.

Yields on Italy’s two-year bonds, which are the most sensitive to political upsets, suffered their biggest one-day jump since 1992 and the euro fell to its lowest value against the dollar in almost a year.

The Milan stock index closing down more than 2.7 per cent, burning €17bn in capitalisation, and Italian bonds suffered a plunge reminiscent of the worst days of the 2011 financial crisis.

Ratings agency Moody’s warned it could downgrade Italy’s rating if the next government fails to address its debt problems, which stand at 132 per cent of GDP – the second highest rate in the eurozone after Greece.

Italy's president Sergio Mattarellaopposed the populists’ choice of a eurosceptic economics minister (AFP/Getty)

In his annual speech on the state of the Italian economy, the governor of the Bank of Italy, Ignazio Visco, warned against the tide of populism, saying “Italy’s destiny is that of Europe.

“We are part of a very large and deeply integrated economic area, whose development determines that of Italy and at the same time depends on it,” he said on Tuesday.

“It is important Italy has an authoritative voice in forums where the future of the European Union is decided,” Mr Visco said, referring to upcoming EU decisions concerning the governance of the bloc, multi-year budgets and the revision of financial rules.

He warned investors would flee the system if they see their wealth eroded because of an economic crisis, and noted “foreign investors will follow suit even more quickly. The financial criss that would ensure would put us back significantly. It would taint Italy’s reputation forever.

Addressing populists who have raised fears outside forces are calling the shots in Italy, he said, “We are not constrained by European rules, but by economic logic.”

An election is likely to focus on Italy’s relationship with the European Union and in particular the budget restraints imposed on members of the eurozone.

A poll by SWG has shown support for the League has jumped to 27.5 per cent, around 10 points up from the 4 March elections, while support for Five Star has fallen about three points to 29.5 per cent.

If the two anti-establishment populist parties decided to join forces again, the poll suggests they would have a majority in parliament.

Additional reporting by agencies