Far Right Surges As Italy Faces Hung Parliament

ROME (Reuters) - Italy faces a prolonged period of political instability after voters delivered a hung parliament on Sunday, spurning traditional parties and flocking to anti-establishment and far-right groups in record numbers.

With votes counted from more than 75 percent of polling stations, it looked almost certain that none of the three main factions would be able to govern alone and there was little prospect of a return to mainstream government, creating a dilemma for the European Union.

A rightist alliance including former prime minister Silvio Berlusconi’s Forza Italia (Go Italy!) held the biggest bloc of votes.

In a bitter personal defeat that appeared unlikely last week, the billionaire media magnate’s party looked almost certain to be overtaken by its ally, the far-right League, which campaigned on a fiercely anti-migrant ticket.

But the anti-establishment 5-Star Movement saw its support soar to become Italy’s largest single party by far, and one of its senior officials said on Monday that forming a coalition without it would be impossible.

The League’s economics chief on Monday raised the possibility of an alliance with 5-Star. Any government based on that combination would be euro-skeptic, likely to challenge EU budget restrictions and be little interested in further European integration.

The full result is not due until later on Monday and, with the centre-right coalition on course for 37 percent of the vote and 5-Star for 31 percent, swift new elections to try to break the deadlock are another plausible scenario.

Despite overseeing a modest economic recovery, the ruling centre-left coalition trailed a distant third on 22 percent, hit by widespread anger over persistent poverty, high unemployment and an influx of more than 600,000 migrants over the past four years.

Prolonged political stalemate could make heavily indebted Italy the focus of market concern in Europe, now that the threat of German instability has receded after the revival on Sunday of a grand coalition under Chancellor Angela Merkel.

In early European trading, the euro dipped while investors dumped Italian government debt, with the yield on its 10-year bonds <IT10YT=TWEB> jumping 10 basis points.

“Italy is far from having sorted its long-standing problems, and now it will have new ones. Be prepared for long and complex negotiations,” said Lorenzo Codogno, a former chief economist at the Italian Treasury.

Parliament will meet for the first time on March 23 and President Sergio Mattarella is not expected to open formal talks on forming a government until early April.

“ITALY UNGOVERNABLE”

During two months of election campaigning, party leaders repeatedly ruled out any post-election tie-ups. However, Italy has a long history of finding a way out of the apparently intractable political stalemate.

The 5-Star once rejected talk of any power sharing, but it now says it is willing to discuss common policies but not negotiate over cabinet posts.

Led by 31-year-old Luigi Di Maio, the movement was formed in 2009 and has fed off public fury over institutional corruption and economic hardship. Some have questioned whether other parties would be able to work with it.

“Di Maio wins, Italy ungovernable,” was the front page headline on La Stampa newspaper.

Claudio Borghi, the League’s economics chief, on Monday suggested that, with Berlusconi on course to lose the leadership of the center right for the first time since he entered politics in 1994, a centre-right headed by League leader Matteo Salvini could find a modus vivendi with 5-Star.

Borghi cited as an example the cancellation of a constitutional requirement to balance the budget.

Meanwhile senior 5-Star member Riccardo Fraccaro said nobody would be able to govern without his party. “We will ... (talk) with all the parties about what this country needs.”

Five-Star and the League once shared strong anti-euro views. The League still says it wants to leave the single currency but 5-Star now says the time for quitting it has passed.

Its flagship proposal in the election campaign was a minimum monthly income of up to 780 euros ($963) for the poor, helping it draw massive support in the underdeveloped south.

By contrast, Salvini and Berlusconi - heading for 18 percent and 14 percent respectively - appeared to have dominated the wealthier north, with the centre-left squeezed into a narrow stretch of central Italy.

“We did not anticipate this rationalization of the electorate... We are going to have to ... find a response,” said senior PD politician Ettore Rosato.

There was much speculation on Sunday night that PD leader and ex-prime minister Matteo Renzi would step down.

Anti-establishment parties have been on the rise across Europe since the 2008 financial crisis. Italy’s mainstream parties have found it especially hard to contain voter anger, with the economy still 6 percent smaller than a decade ago and unemployment stuck at about 11 percent.