Populist plans set Italy on a collision course with Brussels

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As Italy moves closer to the formation of a government between the anti-establishment 5-Star Movement (M5S) and Lega (League), a leak to Huffington Post of a 40-page policy contract between the two Eurosceptic parties that details their roadmap rattled worldwide markets on Wednesday.

Populist and anti-immigrant parties have led European Union governments in Eastern Europe and even in neighboring Austria, but Italy - with the 28-nation European Union bloc's fourth-largest economy and population - would pose a political challenge of another magnitude to the alliance's liberal order.

Italy's two anti-establishment parties agreed the basis for a governing accord on Thursday that would slash taxes, ramp up welfare spending and pose the biggest challenge to the European Union since Britain voted to leave the bloc two years ago. If - and it's a big if - the coalition starts reversing policies and racking up deficits, markets could rapidly lose faith in Italy's ability to repay. A deal between the two is expected some time this week.

Di Maio said the joint program the two groups are drawing up is "almost completed", and called on the League not to pull out at the last moment.

5-Star leader Luigi Di Maio said on Tuesday he hoped a deal could be reached on Wednesday (16 May) that would subsequently be put to supporters of both parties to see if they backed the pact. There was still no word on the thorny issue of who would be prime minister. It would also be Italy's first all-populist government.

Perhaps the simplest way to imagine the eurozone is as a three-legged stool.

This implied "breakup" risk, which had soared at the height of the sovereign debt crisis in 2011/2012, has subsided since France elected centrist Emmanuel Macron as president previous year and Germany re-elected centre-right Chancellor Angela Merkel. Remove any one of those three pillars and the stool falls over.

Populist plans set Italy on a collision course with Brussels
Populist plans set Italy on a collision course with Brussels

The Northern League firmly opposes current European Union budget rules. In recent days, Mr Salvini has been trying to push Mr Di Maio towards a more confrontational attitude with regard to Brussels on everything from the single currency to budget rules and migration policy.

Now that such a government is about to take control of Italy, the possibility of the Italian exit from the euro can not be ruled out. Earlier a Five Star official said that the agreement had been sealed.

But this week, it reared its head again as Five Star and the League closed in on a deal to form a populist government in Rome. It is variously anti-establishment, Eurosceptic, anti-immigration, and pro-green.

The prospect of a more spendthrift government in Italy, already one of the euro zone's most indebted economies, has had only a mild impact on Italian government bonds - leaving many market pundits puzzled.

"Once an Italian government is formed the market will be keen to know the details of the fiscal policy".

Like its peers, Italy has taken advantage of low borrowing costs to extend the average remaining maturity of its debt, which now stands at over seven years. In it, the parties said they planned to ask the ECB to forgive 250 billion euros ($296 billion) of Italian debt purchased under the euro zone central bank's quantitative easing (QE) program.

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