Italy's PM-designate Giuseppe Conte has failed to form a government with reports that his choice of economy minister was rejected by the president. A new vote could be held on September 9, newspaper Corriere della Sera reported on Monday.
But the prospect of a neutral government ignited a backlash among the two populist parties, who are view it as yet another move by special interests to control Italy against the will of the people.
European stock markets and the euro breathed a sigh of relief Monday after Italy's president vetoed the nomination of a fiercely eurosceptic economy minister, averting a potential eurozone crisis, analysts said. Under the constitution, Mattarella names both the premier and ministers-the latter at the premier's suggestion.
"What's the point of going to vote, since governments are decided by the credit-rating agencies and the financial lobbies", he said on his Facebook page.
Carlo Cottarelli, an economist, has previous government experience under the short-lived center-left government of Enrico Letta, tapped to identify areas where government spending could be trimmed.
Since October, he has headed an observatory on Italian public accounts at the Catholic University of Milan, where he has a healthy Twitter feed of 15,000 followers.
In an interview with Bloomberg Television's Francine Lacqua on 17 May, Cottarelli praised the populist program's proposals on fighting bureaucracy and corruption, and speeding up legal proceedings for civil justice. Either EU rules change or it makes no sense for Italy to remain a member of the bloc, he said.
Speaking to the nation later Sunday evening, Mattarella was firm in outlining his constitutional role as guarantor of the cabinet lineup.
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The leader of Italy's right-wing League party says he won't give ground in a standoff that is blocking the country's next government from taking office.
The euro gained ground on the news, adding 0.4 percent against the USA dollar on Monday morning and ticking up against most other major trading partners as well.
European markets will be watched closely this week to see how the fallout affects the euro currency along with Italian stocks and bonds.
Some observers are suggesting the choice of the populist parties to dig their heels in, rather than pick an alternative finance minister, might be a tactic in order to force new elections and potentially get a larger majority. "The main risk is that the stand-off will further embolden the 5-Star, and especially the League". The Italy-Germany 10-year yield spread reached the widest since 2014 on Friday.
League leader Matteo Salvini said that Cottarella was a "Mister Nobody" who "represents financial institutions", while the head of Five Star Luigi Di Maio laughed off his chances of ever gaining the endorsement of a parliament in which his and Salvini's parties command a majority.
However, Italians could be heading back to the polls as Mr Mattarella said he was considering political party leaders' requests for another election. "I asked for a figure who would mean not risking an exit from the euro". The 5Star and League leaders, Luigi Di Maio and Matteo Salvini, demanded that Mattarella call fresh elections, and Di Maio has called for the president's impeachment.
The national news service ANSA released an article announcing that "impeachment" had found its way back into the Italian vocabulary as a result of Mattarella's unprecedented move.