So Italy now has a fully-fledged political crisis on its hands. Now that the government-formation process involving the Lega and the Five Star Movement has broken down for the moment, it is up to State President Mattarella to find a way out of the impasse. Mattarella has invited economist Carlo Cottarelli for talks today and could well charge him with the task of forming a technocratic government. However, such an administration would only be likely to take up the reins of government in Italy temporarily, because the two populist groupings would refuse to give their assent to a cabinet of non-party technocrats. Such a refusal may compel Mattarella to call early elections, but these could only take place in September or October at the earliest. Current opinion polls imply that above all, the Lega has been able to benefit from the turbulence over recent weeks, with the Five Star Movement hanging on to its share of the vote. In an attempt to ward off another round of voting at the last minute, Mattarella could once again ask the populist coalition to attempt to put together a new government; for this to happen, though, Lega chairman Salvini, who has vehemently insisted that his candidate, Savona, should become economics minister, would have to yield to pressure and soften his stance.
Today, the markets initially reacted with relief to the news that the government-formation process had fallen through. Investors are hoping that new elections will be called, which would ensure that – at least until the autumn and the completion of fresh negotiations – there was a brief phase marked by an easing of tensions under a relatively pro-European government. What is more, it would not be clear whether M5S and Lega – who would probably once again emerge victorious at the polls – would be able to reach an agreement in a new round of negotiations. Although the government-formation process would be significantly facilitated if the rightist camp composed of Lega and Forza Italia were to attain an absolute majority, such a majority looks to be rather improbable at the present juncture.
Italy’s medium-term to longer-term prospects remain unfavourable. The political crisis has not been resolved, and scepticism towards Europe, but also towards the country’s institutions, is likely to grow further. This is grist to the mill of the populists, who probably also see this growing groundswell of euro-scepticism as a vindication of their anti-austerity stance. Many investors who have long underestimated the risk emanating from Italy are likely to become conscious that the country’s problems, rather than going away for good, have been merely postponed. Italy therefore threatens to become a veritable stress test for Europe – which will also influence the talks on E(M)U reform which are scheduled to take place in June. Unless the political crisis in Italy is brought to an end, the wider EU will be unable to sail into quieter waters – including the risk of resurgence of the euro area financial crisis.