Rome is burning. Italy’s new populist government went up in flames only days before it was to be sworn in. Pro-Europe politicians and technocrats were relieved, for the populist victors in the March election, the Five Star Movement (M5S) and the League, certainly had no love for the European integration project or the common currency.
But Italian President Sergio Mattarella’s shock decision Sunday night to veto the coalition’s choice for finance minister – the decidedly Euroskeptic economist Paolo Savona – may backfire.
Italian presidents have considerable power, especially in times of inconclusive elections, and can reject proposed cabinet appointees, even the prime minister. When Mr. Mattarella sent Mr. Savona packing, M5S and the League, both enraged by the audacity of the move, immediately ended their attempts to form a government and install a little-known academic, Giuseppe Conte, as prime minister.
A new election is now inevitable, but the populists – especially the rising League – could come back stronger than ever. Then what would Mr. Mattarella do? Would he defy the democratic will of Italian voters once again? A second victory by the populists would make it virtually impossible for Mr. Mattarella to reject any proposed cabinet minister on the grounds that the candidate was not pro-Europe or pro-euro enough for his tastes.
Read more: Italy’s President rejects pick for economy minister, triggers potential crisis
The leader of M5S, Luigi Di Maio, and his counterpart at the League, Matteo Salvini, sent Italy, the European Union’s third-largest economy, into political chaos when they called it quits for their coalition government. Italy is used to short-lived governments – it has churned through 65 of them since the end of the Second World War – but this particular one did not even get officially installed before it walked out the door.
While Mr. Di Maio, 31, and Mr. Salvini, 45, called for Mr. Mattarella’s ouster, European investors were happy, at least initially. In recent weeks, as it seemed inevitable that M5S and the League would form Western Europe’s first populist, anti-establishment government, the prices of Italian bonds sank, rattling investors everywhere – Italy oversees the world’s fourth-largest debt market. The euro also fell, as did the Milan stock market, which had been Europe’s best performer in 2017.
They were rattled because both parties had, in part, built their popularity on bashing the EU and the euro, even if they had tempered their Euroskepticism ahead of the election. At points in their history, the parties had called for a referendum on the euro – that idea has been dropped – and each now supports the idea of using IOUs to pay government suppliers; some economists think those IOUs might evolve into a parallel currency, giving Italy a backup payment system should it bolt from the euro.
Investors were also worried that the new government’s fiscal-expansion plans, including the launch of a guaranteed income for the poorest Italians and a flat tax that would cut almost everyone’s tax rates, would be unaffordable, putting the country on a collision course with the EU’s budget-deficit rules.
But what really rattled investors and pro-Europe politicians across the continent was the proposed appointment of Mr. Savona as finance minister. His new book, Like a Nightmare, Like a Dream, is to be published imminently. In the book, he calls the euro a “straitjacket produced in Germany,” says that Berlin “hasn’t changed its view of the role of Europe since the Nazi era” and that membership in the common currency “involves fascism without dictatorship.”
On Monday, after Mr. Savona’s appointment was rejected and Mr. Di Maio and Mr. Salvini pulled the plug on their government, markets were initially buoyant – Italian bonds, the Milan exchange and the euro rose. But the gains quickly went into deep reverse as investors apparently took the view that months of political strife lay ahead and that the outcome of the next election, possibly in September or October, could propel the populist, Euroskeptic parties to even greater heights.
Maybe Mr. Savona isn’t gone forever.
Mr. Mattarella seems to have made a tactical blunder. On Monday, he called on a former high-ranking official at the International Monetary Fund, Carlo Cottarelli, the author of a spending review for previous governments – the Italian media call him “Mr. Scissors” – to lead an interim government and install a technocrat cabinet. But Mr. Cottarelli himself may not last long as he is unlikely to win the approval of M5S and the League, which, together, have a small majority in both houses of government.
Mr. Cottarelli stands for everything the populists dislike. While nominally independent, he is associated with the centre-left Democratic Party – Italy’s ruling party until its defeat in the March election – which the populists accused of corruption, economic incompetence and being too accommodating to illegal migrants. As a former IMF official, the populists will view him as a member of an undemocratic institution that has put pressure on Italy (and other Mediterranean countries) to rein in spending; all the better, in their view, to please international investors, not the Italian people.
Mr. Cottarelli was asked to keep an interim government intact until early next year, at least. But the gambit may not work – elections could happen sooner if his stop-gap cabinet does not win a parliamentary confidence vote, and it appears it will not. The centrist parties – the Democratic Party and Silvio Berlusconi’s Forza Italia – are shattered. The populists are gaining momentum and they are angry that the unelected head of state, Mr. Mattarella, denied them their choice of finance minister.
If the supporters of populist parties seek revenge, M5S and the League have a strong chance of forming the next government, one with a Euroskeptic streak a kilometre wide. In effect, the election could emerge as a referendum on the euro. If the populists win a bigger majority, Mr. Mattarella would have a big problem. So would investors around the world. And so would Europe. Rome burns today, Europe might burn tomorrow.
Eric Reguly