The dominoes are falling: could "Quitaly" prove one too many for the EU?

Having taken the controversial step of nominating an unelected administrator - Carlo Cottarelli to run the country, Italy's President has sparked outrage from the populists who claim he's overridden democracy. Yesterday, they finally got their coveted share of government; with virtually unknown law Professor Giuseppe Conte sworn in as the new Prime Minister on Friday.

Drumming a hard line towards immigrants, they've threatened to make the next vote a de facto referendum on leaving the EU. Thus, many are worried that Italy will be the next to follow the UK into European autonomy, sparking a domino effect in an already vulnerable post-Brexit Europe.

The meltdown of attempts to form an Italian government last week sent world markets into a spin. Grappling with its own version of the populist backlashes we’ve seen throughout the US and UK, Italian government bonds spiked sharply above 3 per cent. In the following days, Wall Street slumped more than 1 per cent, while Italy’s stock index plunged 2.7% overnight.

So the EU (and the rest of the world) are definitely worried. But it’s the uncertainty of what’s coming next more than anything that is bothering financial markets. Will Italy follow Britain into its own European exit, dubbed “Quitaly”? Who knows, but we must remember that Italian politics are always volatile and politicians everywhere are prone to hyperbole.

If the Italian populists, Lega (League) and the Five Star movement succeed in their mission to leave the Eurozone, there would be nothing stopping a tide of withdrawals from other countries, tired of constant dragooning by Brussels and Germany.

This is certainly coming from the far-right. The leader of Lega, Matteo Salvini, told the press last week: Italy wasn’t a “colony”, and that “we won’t have Germany tell us what to do”. Parties of Salvini’s kind are not uncommon across the rest of Europe — increasing the potential for fragmentation and leading to what some – including the former chief of Britain’s defence staff Lord Bramall – see as a real risk of the structure unravelling. Indeed, a study published this week by the Washington-based Pew Research Center showed public support for the EU had fallen sharply across its largest member states over the past year.

The New York Times Economic Observer Neil Finn has warned us not to be too expectant of change. In an article following the crash he expressed his own doubts about the "contagious effect" of the Italian political crisis; reminding his readers that Italy is "the third-largest economy in the Eurozone (and fourth largest in Europe, after Germany, Britain and France), with one of the biggest piles of public debt in the world," predicting that "a crisis there could endanger banks and investment portfolios everywhere." What he was really saying was, Italy’s fate is already far too invested in Europe to leave.

Rome potentially dropping the euro as the state currency would devalue all Italian government bonds in European banks, inflicting huge damage on the European finance sector. According to some estimates, even if the EU economic institutions manage to sell off a large portion of the Italian national debt, their losses would amount to billions of euros – a precondition for a second global financial crisis.

So opinions vary. But we must not disregard the President. Sergio Mattarella's vetoing of an Eurosceptic economist as the proposed finance minister was a big call. His move shows that Italy's head of state, while predominately a governor-general figure rather than a president in the American sense, is willing to have a go at riding the populists out.

Luigi Di Maio, the Five Star front-runner, and Salvini of the League, have brought the President under intense scrutiny, accusing him of acting too politically when his role is supposed to be neutral.

But if Europe is to retain one of its founding members, after all – the initial European Treaty was signed in Rome, he will have to let his views be known.

At a press conference following Giuseppe Conte's (the populist’s pick for premier and an Eurosceptic) initial resignation, Mattarella declared that the two parties wanted to bring Italy out of the Eurozone and that as the guarantor of the Italian Constitution and the country's interest and stability, he could not allow Conte to take the lead.

A self-proclaimed liberal, he has an important part to play in deciding Italy's future within the EU. And he is turning out to be more influential than perhaps the failed coalition hoped. For those in Brussels, this may prove essential.

So while chaos is the norm in Italian politics, it may be that centrist Italian voters, unsettled by yet more turmoil, will head back to more traditional parties — contrary to what the latest polling suggests.

We are expecting to see fresh elections as early as August or as late as early next year. The Five Star Movement took the largest proportion of the vote in the last election, not the least because of their anti-establishment outlook. So despite his desire to remain within the Eurozone, and the EU, Sergio Mattarella cannot fight the Italian people.

Consequently, the reply from most liberals to the turmoil in Europe is the same as to most politics at the moment: we’ll just have to wait and see.