The League leader Matteo Salvini walks on a stage during a campaign rally for a local election today. Photos / AP
The League leader Matteo Salvini walks on a stage during a campaign rally for a local election today. Photos / AP
European leaders thought they had broken free from doubts about the future of the European Union that plagued them after Britain voted to leave two years ago.
Instead, a fast-moving political crisis in Italy this week has come as a gut punch, reviving fears of a fresh assault on unity.
The worries came after Italian President Sergio Mattarella barred an academic who once called Italy's adoption of the euro an "historic error" from becoming finance minister.
That appeared to blow up a coalition deal between two populist parties that have been seeking to form a government since Italy's March elections.
Now, backlash to Mattarella's move may deliver exactly the opposite of what he intended when he said he was defending Europe and Italy's constitution.
If fresh elections are required, furious Italians could be expected to vote in even greater numbers for the same anti-establishment politicians who nominated the eurosceptic minister in the first place.
Only this time, those leaders may make a fight with Brussels the centerpiece of their campaign, targeting the euro and European rules that tightly restrict how governments spend their money.
The uncertainty sparked a global sell-off, pummelling Asian stocks as European and American markets recovered from a slump a day earlier. Italian government borrowing costs jumped to the most in two decades.
Any crisis could quickly outpace previous ones: When Greece nearly left the euro in 2015, it also set off global economic tumult. Italy's economy, the fourth largest in the European Union, is nearly 10 times that of Greece, and Rome is heavily indebted to creditors around the world.
"You can do serious damage. Nobody can ignore that," said Wolfango Piccoli, the co-president of Teneo Intelligence, a political risk analysis firm.
My appeal to all EU institutions: please respect the voters. We are there to serve them, not to lecture them. #Italy@dwnews
"The drivers that took us here - migration, security, economic insecurity - they are drivers that have been with us for some time, and nobody will be able to tackle them any time soon. So this tide will continue."
Italy's turmoil comes as other European bulwarks are shaking loose.
German Chancellor Angela Merkel, a European rock since 2005, needed six months to pull together a governing coalition after being damaged by an insurgent far-right party in elections last year.
French President Emmanuel Macron trounced anti-EU populists to win office but is now facing anger from voters as he tries to loosen worker protections.
Spain, led by the same centre-right government since 2011, might have a no-confidence vote as early as this week followed by fresh elections.
In Hungary, far-right Prime Minister Viktor Orban won more power in an election observers criticised as unfair and now says his plan is to remake the European Union in his "illiberal" model.
Five-Star Movement leader Luigi Di Maio meets reporters at the Italian parliament, in Rome.
On top of all that are the economic uncertainties related to US President Donald Trump.
Barring a reprieve from the White House, tariffs on US imports of European steel and aluminum are set to start tomorrow, raising the prospect of a transatlantic trade war.
Trump's pullout from the Iran nuclear deal has set off European fears of a nuclear arms race in the Middle East, which also unsettles markets.
Together, the shifts have pro-Brussels Europeans worried about what comes next.
"All these hopes we expressed in 2017 were too positive, went beyond what was realistic and doable and achievable," said Janis Emmanouilidis, the director of studies at the European Policy Centre, a Brussels think-tank with close ties to EU policymakers.
"The scars of what has happened over the last seven or eight years in Europe can easily reopen, and the fears are these scars become big new wounds."
Pro-European leaders and investors had been mostly calm in the months since being surprised by Italian voters' outsize support for insurgent parties in March 4 elections.
Italy is struggling precisely due to this type of analysis which allow populists to have an enemy: useless structural reforms that have little evidence on their side. What’s needed is radically new social compact kicking both business & policy in the bottom. Invest in the future! https://t.co/cZD5zLXuWO
Their first wager was that establishment parties would hem in the populists in any coalition. When the populists looked to ally with each other, Europe's next bet was they would temper their rhetoric in the name of balancing disagreements among themselves and winning concessions from Brussels.
That thinking held until Monday, when Mattarella exercised his constitutional power to bar the anti-euro Paolo Savona, 81, from the post of finance minister, in the name of preserving Italy's economic stability.
Neither of the two parties - the populist Five Star Movement and the anti-immigrant League - made quitting the euro part of their election campaign, but both embraced the idea in the past.
Italians support staying on the euro, and Mattarella appears to be gambling that if new elections are held, the populists could be forced to more clearly articulate their plans for the currency.
In the meantime, he proposed Carlo Cottarelli, a former senior official at the International Monetary Fund known as "Mr Scissors" for his spending cuts, as head of a technocratic government. With most parties declaring they would vote against him in a confidence vote, elections are likely to be held in July or September.
Italian President Sergio Mattarella.
Mattarella's move was in some ways an ideal foil for the populist parties, who have made taking on establishment stalwarts like him a primary part of their appeal to voters.
The League has done especially well in the months since the election, increasing its share of support to nearly 28 per cent in one recent opinion poll, after winning 17 per cent in March.
Analysts believe League leader Matteo Salvini may be using the dispute over Savona to force new elections and flip the tables on the Five Star Movement, which is currently the senior partner in the coalition.
The political maneuvering continued today, as Salvini and Five Star leader Luigi di Maio appeared to take one more stab at forming a coalition.
Di Maio, whose party has slumped in support since March, said he was ready to make a deal and would seek to renegotiate EU rules with Brussels.
Much of Italy's government debt is held by Italians, making it politically unpalatable to stop repaying it. If the country left the euro, Italians' savings would likely evaporate from their bank accounts - an unattractive option for leaders who will need to face voters. And over years of economic crisis, Brussels has become skilled at going to the brink but coming up with compromise when big countries demand it.
That calculation appeared to be why markets were recovering following the sell-off.
European budget commissioner Günther Oettinger suggested yesterday that financial turmoil in the coming weeks could "be a possible signal for voters not to choose populists from the left and right."
The chiding from a bureaucrat in Brussels was a political gift to the insurgents.
"These people treat Italy as a summer colony where they come and spend their vacation," di Maio wrote on Twitter. "But in a few months, a government of change will be born, and Europe will finally respect us."
Oettinger was quickly forced to apologise. European Council President Donald Tusk issued the Twitter equivalent of a facepalm: "My appeal to all EU institutions: please respect the voters. We are there to serve them, not to lecture them."
