Italy's fresh election risks being referendum on euro

[May 29, 2018]  By Steve Scherer

ROME (Reuters) - The euro looked to have dodged a bullet when Italy's would-be eurosceptic coalition government collapsed at the weekend, but it may turn out to have been the opening salvo in a war over Europe's single currency.

On Sunday, Italy's president rejected the nomination of a eurosceptic, Paolo Savona, for the economics ministry by the far-right League and anti-establishment 5-Star Movement because Savona had previously said Italy should leave the euro zone.

But now the two parties, who were rivals in the March vote, are weighing whether to join forces ahead of a fresh election seen in the autumn or early next year.

"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.

"Today Italy is not free; it is occupied financially by Germans, French and eurocrats."

The euro, bonds and stocks initially rallied on Monday after President Sergio Mattarella vetoed Savona's nomination, but relief turned to fear over snap elections. The gap between Italian and German 10-year bond yields, a measure of Italian risk, widened to its highest in over four years.

"The election is going to resemble a referendum, de facto, on the European Union and the euro," said Francesco Galietti, head of political risk consultancy Policy Sonar in Rome. "It's an existential threat for the entire euro zone."

If Italians were to cast a protest vote against the EU and euro at fresh elections, it would deliver the bloc's biggest challenge since Britain voted to quit the union two years ago and raise questions about the future of the single currency.

As the euro zone's third-largest economy, heavily indebted Italy also represents a far bigger potential threat to the single currency than the Greek economic crisis.

Polls show the League has gained support since winning 17 percent of the vote in inconclusive March 4 elections, climbing as high as 24 percent. The 5-Star has been drawing about the same 32 percent it got two months ago.

Former prime minister Massimo D'Alema, caught speaking on an open microphone on Saturday, summed up the fears of traditional parties: "If we go back to elections because of a veto on Savona, they (anti-establishment parties) are going to win 80 percent."

On the street, some voters believe Salvini is right to challenge the president's veto and go back to the polls.

"I'm really ticked off. The president sold out the country," said Giancarlo Sacco, 54, owner of a cafe in central Rome. Sacco said he wanted Italy to remain in the euro but that its concerns needed to be taken seriously by EU partners.

"It just has to make itself respected again."

Italian President Sergio Mattarella speaks to media after a meeting with Italy's Prime Minister-designate Giuseppe Conte at the Quirinal Palace in Rome, Italy, May 27, 2018. REUTERS/Alessandro Bianchi

The president's veto of Savona as economy minister has put the currency, which was little discussed in the last election campaign, at the center of the debate.

"Membership of the euro is a fundamental choice," Mattarella said in a televised speech, explaining his veto. "If we want to discuss it, then we should do so in a serious fashion."

In February, Salvini railed against the euro, saying it was a "mistake for our economy".

"We don't have a euro in our pockets. We have a German mark which they called the euro," he said.

The 5-Star dropped its previous calls for a non-binding referendum over Italy's euro membership, though its founder, comic Beppe Grillo, recently revived the idea.

Political tensions are running high, with the League threatening street protests against Mattarella.

On social media, League and 5-Star sympathizers made death threats against the president, while supporters crowding around Salvini and Di Maio during live TV interviews late on Sunday shouted insults at him.

On the other side are Italians who, like many Britons devastated by the Brexit vote, see the country's relationship with Europe as fundamental.

"I am absolutely pro-European and I believe that Italy is connected, must have a connection with Europe for our future," said Irene Teramo, a shopper at a street market in Rome, who supported the president's decision.

Italians will also be weighing concern about their savings as financial markets put the country's stock market and bonds under pressure and borrowing costs increase.

"In his heart, the average voter will probably be cheering for the anti-establishment forces, but his wallet will be saying the opposite," said political risk expert Galietti.

"It will be a heart versus wallet election."

(Editing by Robin Pomeroy)

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