Italy headed for fresh elections under caretaker PM

President appoints economist Carlo Cottarelli to lead country after scuttling bid to form government by 5-Star and League

Carlo Cottarelli addresses a press conference at the Quirinale Palace in Rome after being asked to form an interim government by President Sergio Mattarella. Alessia Pierdomenico / Bloomberg

Italy's president set the country on a path back to fresh elections on Monday, appointing a former International Monetary Fund official as interim prime minister with the task of planning for snap polls and passing the next budget.

The decision to appoint Carlo Cottarelli to form a stopgap administration sets the stage for elections that are likely to be fought over Italy's role in the European Union and the euro zone, a prospect that is rattling global financial markets.

The euro zone's third-largest economy has been seeking a new government since inconclusive March elections, with anti-establishment forces abandoning their efforts to form a ruling coalition at the weekend after a standoff with the president.

President Sergio Mattarella had vetoed the parties' choice of a eurosceptic as economy minister, prompting the 5-Star Movement and far-right League party to accuse him of betraying voters and to drop their plan to take power.

Mr Cottarelli told reporters after his appointment as interim prime minister that elections would be held in the autumn or early next year. He also tried to reassure investors.

"Speaking as an economist, in the past few days the tensions on the financial markets have increased," said Mr Cottarelli, who had served as a cost-cutting tsar to a previous government.

"Nonetheless the Italian economy is still growing and the public accounts remain under control. I can absolutely guarantee that a government led by me would assure a prudent management of our public accounts," he said.

The prospect of fresh elections raised fears among investors that the vote could become a de facto referendum on Italy's euro membership. The euro hit a fresh six-month low and yields on Italian government bonds climbed.

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Already Italian politicians are back in campaign mode. A 5-Star source said the movement was considering an election alliance with the League. In March, 5-Star ran its own campaign while the League campaigned as part of a right-wing coalition.

Mr Cottarelli can continue as a caretaker until the next election, even if he fails to win the confidence of parliament where 5-Star and the League have a collective majority.

He has been tasked with passing the 2019 budget by the end of this year, a challenge that may prove impossible without the confidence of parliament. In those circumstances, elections could be held as soon as September.

In a televised address on Sunday, Mr Mattarella said he had rejected the coalition's candidate for the crucial economy portfolio, 81-year-old Paolo Savona, because the economist had threatened to pull Italy out of the euro zone.

"The uncertainty over our position has alarmed investors and savers both in Italy and abroad," Mr Mattarella said, adding: "Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion."

The League and 5-Star, which had spent days drawing up a coalition pact aimed at ending the stalemate that has lasted since March, responded with fury to Mr Mattarella, accusing him of abusing his office.

5-Star leader Luigi Di Maio called on parliament to impeach the president. League chief Matteo Salvini threatened mass protests unless snap elections were called.

"If there's not the OK of Berlin, Paris or Brussels, a government cannot be formed in Italy. It's madness, and I ask the Italian people to stay close to us because I want to bring democracy back to this country," Mr Salvini said.

However, he dismissed Mr Di Maio's call to impeach the president. "We need to keep cool. Some things cannot be done in the throes of anger," he told Radio Capital.