ROME—Two large antiestablishment parties were in talks Thursday on reviving a coalition government that could bring a euroskeptic administration to power in the eurozone’s third-largest economy.
On Sunday, Italian President Sergio Mattarella rejected a previous attempt by the 5 Star Movement, a maverick party that is Italy’s largest political group, and the nativist, hard-right League, to form a government.
He vetoed their nomination of Paolo Savona, an 81-year old economist, as economy minister out of concern that Mr. Savona’s euroskeptic views could endanger Italy’s membership in the single currency.
The president then asked Carlo Cottarrelli, an economist and former International Monetary Fund official, to try to form a caretaker government to ferry the country to new elections.
However, with virtually every political party opposing a government lead by Mr. Cottarelli, it appeared that Mr. Mattarella would instead dissolve parliament and call snap elections, possibly as soon as July.
But on Wednesday, 5 Star leader Luigi Di Maio proposed a new government with the League in which Mr. Savona would assume another ministerial post. A different candidate—whom Mr. Di Maio didn’t name—would become economy minister.
League leader Matteo Salvini said Wednesday he would consider such a possibility.
The president decided to give the two parties more time to see if such a new a government could succeed. He didn’t give the two leaders any deadline.
If such a government doesn’t materialize, the president will likely ask Mr. Cottarelli to move ahead with the formation of a caretaker government that will pilot Italy to new parliamentary elections within months.
Financial markets have been badly shaken by the events in Italy. Many investors were rattled by the strong anti-Europe and anti-euro rhetoric of the 5 Star and the League in the wake of Mr. Mattarella’s decision to veto Mr. Savona.
If the League and 5 Star manage to form a government, investors may be relieved that Italy won’t face a snap election just months after a parliamentary vote in March. At the same time, the two parties have made little secret of their antipathy for the euro and the European Union, so a coalition government between the two could still unsettle markets.
An auction of Italian government bonds with maturities between two and 10 years on Wednesday received reasonable demand, albeit at much higher yields than at recent auctions, signaling investor nervousness about Italy’s EUR2.3 trillion public sector debt. On Thursday morning, markets were considerably calmer.
Write to Giovanni Legorano at giovanni.legorano@wsj.com
