Mamma mia- here we go again.

Will Italy follow the UK's Brexit with its own version of a European exit?

Some are already dubbing it "Quitaly".

The meltdown of attempts to form an Italian Government this week - and threat that fresh elections may become a referendum on a European Union exit - sent world markets into a spin.

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Wall Street slumped by more than a 1 per cent this morning. In Europe, Italy's stock index plunged 2.7 per cent [overnight Tuesday].

Turmoil in Italian politics has been more of a norm than an aberration for the past 2000 years or so.

But that doesn't mean this isn't serious.

Essentially Italy is grappling with its own version of the populist political backlashes we've seen in the US and UK.

In March the anti-establishment Five Star Movement won the largest share of the vote.

The party was started by celebrity comedian and blogger Beppe Grillo as a bit of a joke in 2009.

For many Italians, the joke stopped being funny early this month when Five Star announced a coalition deal with the extreme right-wing, anti-immigration Lega (League).

These guys had been around for years as the Lega Nord – a party formerly dedicated to Northern Italian independence – but they rebranded in 2018 to broaden their base.

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The Five Star/Lega coalition tried to form a Government last week but when leader Giuseppe Conte proposed a radical anti-Europe finance minister, the Italian president Sergio Mattarella stepped in.

The Italian president is an elected head of state intended to be more like our Governor-General than a US-style President - so this was a big call.

He has taken the highly controversial step of appointing an unelected administrator - Carlo Cottarelli, an economist with International Monetary Fund experience - to run the country until new elections are held.

That's prompted outrage from the populists who claim he's overridden democracy.

They've threatened to make the next vote a de facto referendum on leaving the European Union - and that has spooked markets.

Debt markets are rattled and the yield on Italian bonds has spiked sharply above 3 per cent.

That's ugly, although it is worth noting that in 2012 at the height of the debt crisis those bonds had spiked above 7 per cent.

So what next? Will we see an Italian exit? Will Quitaly take its place alongside Brexit in the list of global worries?

Who knows? Italian politics is always volatile and politicians are prone to hyperbole. And this is a nation that has battled to keep itself together over the years, as indicated by a non-binding referendum in 2014 which showed that 89 per cent of voters wanted the rich northern province of Veneto declared independent from the rest of Italy.

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.

But more ominous, latest polling shows Lega picking up support.

Post-Brexit Europe is vulnerable and there are fears that a second major exit might spark a domino effect.

We could see fresh elections as early as August or as late as early next year.

Until then expect to see more financial market volatility out of Europe - just what our KiwiSaver accounts didn't need.