Showdown looms in Italy as caretaker PM assembles team

Former IMF official Carlo Cottarelli.

Veneto's governor and former Minister of Agriculture, Luca Zaia, also slammed Mattarella's decision to block the new government as "a pretext to stop the wind of change that was identified during the elections".

Denying the populist coalition of the hard-left Five Star Movement and the League its chance to form a government despite their majority in parliament tested the powers of Italy's president.

No such luck. Mattarella rejected the coalition's choice of Paolo Savona, a controversial Euro-skeptic professor, as minister of the economy.

Padoan also said the parties should have vocally ruled out a proposal put forward in Savona's most recent book, which said Italy should draw up a "plan B" for the country to leave the eurozone with as little damage as possible if it should prove necessary.

"In a democracy, if we are still in democracy, there's only one thing to do, let the Italians have their say", he told supporters in a speech in central Italy.

"I have given up my mandate to form the government of change", said lawyer and political novice Giuseppe Conte, 53, plunging the country into a political crisis almost three months after March's inconclusive general election.

The 81-year-old billionaire former prime minister released a statement on Sunday in which he praised Mattarella's efforts to "safeguard this country's families and businesses".

"The upcoming elections will not be political, but instead a real and true referendum. between who wants Italy to be a free country and who wants it to be servile and enslaved", League leader Matteo Salvini said on Monday.

The choice of Cottarelli, right, who met with Mattarella in Rome, could calm the markets, which had been spooked by the prospect of a Five Star-League coalition. On Italian television the M5S leader said: "First the impeachment of Mattarella. then to the polls".

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Mr Cottarelli, 64, worked at the International Monetary Fund from 2008 to 2013, gaining the nickname "Mr Scissors" for making cuts to public spending in Italy.

Upon accepting a mandate from the president to form a technocratic and politically "neutral" government, Mr Cottarelli said his first task was to introduce a programme to parliament, including next year's budget.

Cottarelli would appease financial markets but his administration may not get sufficient parliamentary support, meaning such a cabinet would remain in office as a caretaker for some months until a new round of elections is held.

Mainstream centre-left and centre-right parties were seen losing further ground in the face of voter anger over the sluggish economy, high unemployment and rising poverty.

Salvini and Di Maio furiously denounced the presidential veto, blasting what they called meddling by Germany, debt ratings agencies, financial lobbies and even lies from Mattarella's staff. Sacco said he wanted Italy to remain in the euro but that its concerns needed to be taken seriously by European Union partners.

Salvini and Di Maio had met Mattarella informally on Sunday to try to find a solution.

Germany was more cautious, with Chancellor Angela Merkel's spokesman saying: "Respect for Italian democracy and democratic institutions requires us to wait and see which government will lead the country and which ideas it will present to its European Union partners".

League party leader Matteo Salvini speaks at the media after a round of consultations with Italy's newly appointed Prime Minister Giuseppe Conte at the Lower House in Rome, Italy, May 24, 2018. Given the populists' majority in parliament, he will nearly certainly fail to get the required vote of confidence, triggering new elections within the next few months.

Investors were also anxious that the new government's fiscal-expansion plans, including introducing a guaranteed income for the poorest Italians and a flat tax that would cut nearly everyone's tax rates, would be unaffordable, putting the country on a collision course with the EU's budget-deficit rules.

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