Italy heads for populist government after months of stalemate

GETTYFive Star Movement's leader Luigi Di Maio called the president's choice'incomprehensible

GETTYFive Star Movement's leader Luigi Di Maio called the president's choice'incomprehensible

Italy's inconclusive parliamentary election in March produced months of political stalemate before Mattarella asked Conte, a political novice tapped by the 5-Stars and League, to try to form a government.

The country's new prime minister Carlo Cottarelli, an unelected former International Monetary Fund official, had been expected to submit his list of ministers to president Sergio Mattarella yesterday, but left without comment after about an hour, delaying the formation of a government.

The prospect of a new vote fueled by euroskeptic outrage spooked investors who feared the election would become a vote on whether Italy should abandon the euro, with uncertain consequences for Europe's economy.

Milan's stock index opened up 2.5% and Italy's borrowing rates eased further after having soared earlier in the week when it appeared that the country was heading towards new elections that could have turned into a referendum on the euro.

On Wednesday afternoon, Di Maio met informally with Mattarella followed by Cottarelli.

"This circumstance, also considering market tensions, has compelled him to wait for further developments", the statement said.

Three officials at the European Central Bank told Reuters the ECB was not considering any intervention as indicators were not yet showing signs of stress among banks and the central bank did not have the tools or mandate to solve what they said was being treated as essentially a political crisis. The political stability brought financial relief, but Italy's European neighbors continued to express concern about the euroskeptic bent and the heavy spending agenda of the new government.

It wasn't clear what shape a political government might take.

Under the new agreement, 5-Star leader Luigi Di Maio and the League's Matteo Salvini will be deputy prime ministers.

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League leader Matteo Salvini said he would be willing to revisit the proposed 5-Star-League agreement that had formed the basis of their proposed alliance. I suppose they will be very prudent, there was a very strong tug of war between Mattarella and the proposed economic minister Savona, where they talked about a plan B to leave the Euro.

Their ambitious economic proposals - which include a universal basic income for Italy's poorest, rolling back pension reform and a two tier flat tax - have anxious Brussels and financial markets given the country's sizeable debt.

"Italians have to take care of the poor regions of Italy", he said.

President Sergio Mattarella called a meeting with the populist's pick: a law professor whose attempt to form a government failed four days ago. Salvini also put forward adding another member of the center-right bloc, Giorgia Meloni.

In his place at the economy ministry is Giovanni Tria, a mainstream economist at Rome University who is considered close to the Forza Italia party of ex-Premier Silvio Berlusconi.

Analyst Codogno said signals that the Democratic Party, which led Italy's last government, wouldn't vote in favor of a Cottarelli-led administration during mandatory confidence votes had dimmed its chances.

"I am absolutely pro-Europe".

If the populists make reality of central campaign promises that could swell Italy's already staggering high debt, the European Union and financial markets might grow uneasy again. "But certainly Italy has been pushed a bit to the margins".

Mr Cottarelli returned for informal discussions on Wednesday with Mr Mattarella after asking for more time to come up with a list of cabinet ministers, and left without comment. On top of that, any ministers would have to commit not to run in upcoming elections and would have to abandon current jobs, if only for a couple of months.