Italy risks a new financial crisis after the collapse of the coalition

Italy risks careening into a new financial crisis after the Bank of Italy said the country’s leaders could not “disregard” financial constraints and its commitments to Brussels.

Escalating worries that Italians may be poised to take a tougher stand against the euro prompted a round of accusations and finger-pointing among EU officials, including a rare admonishment by Donald Tusk, the European council president, who said EU institutions needed to show “respect to voters” in Italy.

“We are there to serve them, not to lecture them,” Tusk said after the German budget commissioner, Günther Oettinger, had suggested the market turmoil in Italy would show voters the dangers of supporting populists.

Ignazio Visco, the Bank of Italy chairman, said the country was at risk of losing the “asset of trust” with investors. On Tuesday the Italian bond spread, a leading indicator of investor concern, rose to its highest level in four years.

The crisis was set off late last week when the the Five Star Movement (M5S) and the League, which had been attempting to form a government, insisted that the president, Sergio Mattarella, approve their choice for finance minister, Paolo Savona, who is a fierce critic of the euro. Mattarella and the incoming populist government collapsed before it had taken power.

The president , Carlo Cottarelli, a former director at the International Monetary Fund, who was expected to present a list of ministers to Mattarella on Tuesday. The president’s spokesman said after a meeting that the two officials would meet again on Wednesday morning.

Cottarelli is expected to lose a vote of confidence in the Italian parliament, which in turn is likely to lead to a new election, possibly as early as July.

In Brussels, politicians were supportive of Mattarella’s move, which was seen as protecting Italy’s position in the eurozone. But there was also concern that the populist parties could win a bigger parliamentary majority in the new election, creating a bigger risk for the future of the eurozone.

In an interview with the German news network Deutsche Welle, to be aired on Tuesday night, Oettinger said: “My concern and my expectation is that the coming weeks will show that markets, that government bonds, that Italy’s economic development could be so drastic that this could be a possible signal to voters not to choose populists from left and right.”

The Italian embassy in Brussels responded by tweeting to Oettinger and Tusk: “Italian voters do not need any teaching. Free #elections and #democracy are key European values.”

Manfred Weber, the leader of the largest group in Brussels, the European People’s party, of which the German chancellor, Angela Merkel, is a member, said he trusted in the Italian constitution and its president.

The leader of the socialist group, Udo Bullmann, a German MEP, said Mattarella had done “a great job” and had “safeguarded the future of the next generation”.

But Philippe Lamberts, the leader of the Green group, warned against complacency. “Let me be clear: I have no time for the government that was being formed in Italy, but like it or not that was the choice made by Italians and at some point in time you have got to accept that,” he said.

“Would it have endangered the eurozone? Yes, of course, but what we have seen over the weekend [is] that tensions in the financial markets have not calmed down but been exacerbated.”

Guy Verhofstadt, the former prime minister of Belgium, who leads the liberal group, said the crisis proved the need for an EU finance minister with a budget and a banking union to ease the pressure on the eurozone during such periods of political instability. “Everyone knows what we need to do,” he said.

Mattarella has faced a political storm and threats of violence over his decision. Some critics argue the two populist parties that emerged as the had a mandate to challenge the euro.

On Sunday Mattarella emphasised he had accepted most of the populist government’s recommendations, despite “perplexities” over its choice of prime minister, with “a great sense of cooperation”.

“I shared and accepted all the proposals made for the ministers, except the one for the minister of the economy,” he said. He had sought an individual who “may not be seen as the promoter of a line of reasoning … that could probably, or even inevitably, provoke Italy’s exit from the euro. This is evidently quite different from having a strong attitude within the European Union in order to improve it for the better from the Italian point of view.”

Until the weekend, investors had remained calm about the prospects for the Italian economy and its public sector debt mountain, which ranks as the third largest in the world behind the US and Japan. But that changed this week.

The Milan stock market slumped on Tuesday to it lowest level since July 2017, down more than 1,000 points from the previous day’s high and 3,000 points lower than its best performance this month.

The euro, which Italy uses as its currency along with 18 other countries, dropped to its lowest level against the US dollar in six months.

Fiona Cincotta, a senior market analyst at the spread betting firm City Index, said Italy’s unsettled domestic politics had also damaged confidence in London, where the FTSE 100 closed down 1.26%.