Published: Fri, May 18, 2018

Italy threat to rip up Eurozone rules shakes European Union powerbrokers

Italy threat to rip up Eurozone rules shakes European Union powerbrokers

Italy's two anti-establishment parties on Friday promised to ramp up spending in a programme for a new coalition government, putting them on a collision course with the European Union despite watering down some of their most radical proposals.

Milan's stock market closed down 2.32 points Wednesday amid fears that after more than two months of political deadlock, Italy was indeed heading to a populist, euroskeptic government.

5-Star leader Di Maio said just before the election he would hold the deficit at 1.5 percent, having previously pledged to raise it above the EU's 3 percent ceiling to allow extra spending on public investments.

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. Both groups have a history of euroscepticism.

Berlusconi has refused to govern with the 5-Stars, who he regards as "more risky than communists". The euro fell to a five-week low against the dollar, and Italy's benchmark 10-year bond was set for its biggest one-day gain since July of last year.

The anti-establishment 5-Star movement and the far-right Northern League could have enough support for a majority after Sunday's (4 March) general election, although some analysts believe such a coalition is unlikely.

It is still far from clear whether Five Star and the League are prepared to go all the way - and in fact the bluster on the euro may simply be the product of a political compromise in their negotiations that will never translate into policy. A more conciliatory Di Maio promised dialogue with the European Union, but warned that "we won't be subordinates to some Eurocrats".

Scrapping the unpopular pension reform would cost 15 billion euros, another 12.5 billion is needed to head off the planned hike in sales tax, and the parties are also considering printing a new, special-purpose currency to pay off state debts to firms.

The two parties won more than 50% of the March vote between them as they look to lead the eurozone's third largest economy.

Outgoing Prime Minister Paolo Gentiloni told European Union leaders in Bulgaria that he and other leaders were anxious that fundamental issues such as the need to safeguard public accounts were now up for political discussion.

"With continued ECB bond-buying there is confidence there won't be a disorderly selloff, but if you get fiscally irresponsible policies and confrontation with the ECB and EU partners then there's a risk of a far greater blow-out of Italian bond spreads".

The contract for the M5S-League government features plans to introduce a two-tier flat tax, a basic income and the revision of a 2011 pension reform that raised the retirement age, among other measures. Economists say this would cost well over €50bn in lost revenues.

Both Di Maio and the strongly eurosceptic Salvini have remained tight-lipped over who will be their PM candidate. Five Star and the League joined forces this month in response to President Sergio Mattarella's proposal to appoint a caretaker government.

Each party plans to consult its supporters over the weekend to see if they back the possible pact for government.

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