By Crispian Balmer and Steve Scherer
ROME (Reuters) - Italy's president is expected to ask a former International Monetary Fund official on Monday to head a stopgap government amidst political and constitutional turmoil, with early elections looking inevitable.
President Sergio Mattarella has called in Carlo Cottarelli after two anti-establishment parties angrily abandoned their plans to form a coalition in the face of a veto from the head of state over their choice of economy minister.
In a televised address, Mattarella said he had rejected the candidate, 81-year-old eurosceptic economist Paolo Savona, because he had threatened to pull Italy from the single currency.
"The uncertainty over our position has alarmed investors and savers both in Italy and abroad," he said, adding: "Membership of the euro is a fundamental choice. If we want to discuss it, then we should do so in a serious fashion."
Financial markets tumbled last week on fears the coalition being discussed would unleash a spending splurge and dangerously ramp up Italy's already huge debt, which is equivalent to more than 1.3 times the nation's domestic output.
After Mattarella's move, the euro gained ground, adding 0.6 percent against the Japanese yen (EURJPY=) and ticking up against other major trading partners as well. (EUR=) (EURJPY=)
The far-right League and anti-establishment 5-Star Movement, which had spent days drawing up a coalition pact aimed at ending a stalemate following an inconclusive March vote, responded with fury to Mattarella, accusing him of abusing his office.
5-Star leader Luigi Di Maio called on parliament to impeach the mild-mannered Mattarella, while League chief Matteo Salvini threatened mass protests unless snap elections were called.
"If there's not the OK of Berlin, Paris or Brussels, a government cannot be formed in Italy. It's madness, and I ask the Italian people to stay close to us because I want to bring democracy back to this country," Salvini told reporters.
SHORT-TERM SOLUTION
While he had approved all their other ministerial picks, Mattarella said he had the right to block nominations that could harm the country. He added that the League and 5-Star had refused to put forward any other name for the role.
Shortly afterwards, the president's office summoned Cottarelli, the IMF's former director of fiscal affairs, for a meeting on Monday. Such a call is usually a prelude to being offered a mandate to form a government.
Cottarelli would be a calming choice for the financial markets, but any technocratic administration would likely only be a short-term solution because the majority of parliamentarians have said they would not support such a government.
If, as expected, he fails to win parliamentary backing, Cottarelli would simply ferry Italy to elections that would most likely be held in September or October. It would be the first time in postwar Italian history that such a re-vote was needed.
Polls have suggested that the League, which won 17 percent of the vote in March, would surge in any early ballot, while support for 5-Star remained strong on around 35 percent.
Mainstream center-left and center-right parties were seen losing further ground in the face of voter anger over the sluggish economy, high unemployment and rising poverty.
Demanding an immediate ballot, Salvini told followers on Facebook (NASDAQ:FB): "It won't be an election, it will be a referendum between Italy and those on the outside who want us to be a servile, enslaved nation on our knees."
Salvini declined, however, to be drawn on whether he would back calls by 5-Star and a far-right ally, the Brothers of Italy, to chase Mattarella out of office.
"We will ask parliament to charge Mattarella with high treason because he has acted under foreign pressure," Brothers of Italy chief Giorgia Meloni said on La7 television channel.
The 5-Star's Di Maio demanded impeachment under article 90 of the constitution. Under that clause, parliament can seek to remove a president if a simple majority of lawmakers votes in favor. The constitutional court would then be called to decide whether to enforce the decision.
The center-right Forza Italia party and the center-left Democratic Party (PD) both denounced calls for impeachment, with former PD leader Matteo Renzi saying his party would take to the streets to defend Italy's institutions if needed.
"Today, we need people to say 'no' to those who want to break us apart, who make excuses rather than assuming their responsibilities, who are playing on the anxieties of others," Renzi, a former prime minister, wrote on Facebook.