(Bloomberg) -- Italy’s Five Star Movement has abandoned its efforts to form a government and is gearing up for fresh elections.
Luigi Di Maio, head of the anti-establishment party, declared the campaign open with President Sergio Mattarella still considering one last attempt to break a two-month deadlock with a technocratic government. Matteo Salvini of the anti-immigrant League also rejected the idea of a non-partisan prime minister and called for elections on July 8 if, as seems likely, there’s no last-ditch agreement between party leaders.
“From today we’re fighting an election campaign and we’ll tell people about these two months of lies,” Di Maio said in a video on Facebook (NASDAQ:FB) on Monday, accusing his rivals of acting only in their own interests. He denounced Salvini -- with whom he had been negotiating for weeks -- of trying to form a government of “turncoats and traitors.”
The populist rivals are betting that they can break the political impasse by going back to the voters rather than cutting a deal with other parties. They’ll likely denounce Mattarella’s efforts at compromise as another establishment stitch-up akin to the unelected government of Mario Monti that stepped in from 2011 to 2013 to steer Italy through the height of the financial crisis.
‘Barring a Miracle’
The breakdown of talks amounts to a failure for Mattarella, who’s been trying to engineer a consensus to push through a 2019 budget and reform the voting system before holding another ballot. Without electoral reform, the next parliament could prove just as divided as the one elected in March.
“Barring a miracle, we’re heading for a repeat election with the same electoral system,” said Fabio Bordignon, a political science professor at the University of Urbino.
Salvini has benefited the most from the post-election bargaining and quarreling. The League has jumped 4 percentage points since the vote, according to an average of surveys by polling group Youtrend on May 3. Five Star is up a point at 34 percent while the center-right alliance is close to 40 percent.
The League leader is still paying lip service to the possibility of a last-minute U-turn from Di Maio paving the way for a deal -- he’s ruled out an alliance with the “losers” of outgoing Prime Minister Paolo Gentiloni’s Democratic Party -- though he’s also turning his attacks toward Five Star.
“I’m doing everything I can to give a government to this country,” Salvini told reporters Monday. “Five Star is pretty fickle -- a bit here, a bit there. The next time, at the election, it will be a referendum, either them or us.”
Markets Calm
Mattarella is tussling with the populists to retain control of the process and may name a compromise candidate for prime minister as early as Tuesday, regardless of their opposition, according to a senior state official who asked not to be named. While the president’s nominee could be sworn into office, he would lose a confidence vote in parliament unless either Di Maio or Salvini drop their opposition. The official said elections will probably be held in July unless there is a shift.
Investors have so far shown little worry about the political infighting despite the threat of the populists’ spending policies. The spread between Italy’s 10-year government bonds and similarly dated German bunds narrowed by 3 basis points on Monday to 123 basis points compared with an average of 133 basis points this year.
“Markets are going to take a hit if we go for July elections and another two months without knowing whether we get a government or not,” said Erik Jones, professor of international political economy at the Johns Hopkins University in Bologna.