Carlo Cottarelli will not be Italy’s first caretaker leader. Nor will he be the first technocrat to take over the reins of power in Rome. But he is the first to be handed the job by a supposedly apolitical president in defiance of the democratic will of the people as manifested in the support they gave for two populist parties in the recent March election.

Hence the turmoil in the financial markets that greeted the controversial decision by Italy’s president – Sergio Mattarella – to invite Cottarelli to form a government. If the idea of appointing a safe pair of hands to be prime minister was to reassure jittery investors, the plan was not immediately successful. Italian bond yields – the interest rate paid on government borrowing – saw their biggest one-day jump since 1992.

Those who voted for the Five Star Movement (M5S) and the Lega did so because they were fed up with austerity, fed up with two decades of nugatory growth, and fed up with a political establishment deemed to have run out of ideas. In those circumstances, the choice of Cottarelli – a former International Monetary Fund director with the nickname “Mr Scissors” due to his reputation for cutting public spending – is a massive political gamble.

And not just for Italy. George Soros has warned that the eurozone faces an existential crisis, and he is not alone in thinking that. What’s more, any evidence of disintegration would have much wider ramifications. For years, financial markets have been wondering where the next global crisis will come from. A breakup of the euro caused by “Italeave” would certainly do the trick.



Monetary union would have survived the departure of Greece; it would not survive the loss of Italy

Soros says Europe needs to reinvent itself and jettison its addiction to austerity. That, though, doesn’t seem remotely likely, judging by the remark of Germany’s European commissioner, Günther Oettinger, who said that the effect on Italy’s markets “will become so far-reaching that it might become a signal to voters”.

Oettinger’s comments reflect the view in Brussels and Berlin that Italy can be given the same hardline treatment as Greece. The populist parties say a relaxation of the EU’s strict budget rules would lead to faster growth, but that is seen as unacceptable. The assumption is that sooner or later Italy will cave in, just as Greece did in 2015.



Yet Italy is in a different category from its Mediterranean neighbour. It is much bigger and has never been comfortable as a member of the single currency. Growth is slow, living standards have stagnated, unemployment is high. Monetary union would have survived the departure of Greece; it would not survive the loss of Italy.

Italians still support the euro, although not as enthusiastically as they once did. Bringing back the lira would be disruptive and economically painful, which explains why neither M5S nor the Lega will make exiting the euro the centrepiece of their campaigns.

Instead, they will argue that the next election will be about democratic legitimacy and the right of Italians to get the sort of government they want. Euro departure is very much a fallback option, but it is an option nonetheless. Which is why the markets are so nervous.