Italy’s two populist parties are preparing to set the eurozone’s third largest economy on a path of large tax cuts and spending increases that would widen the budget deficit.
Luigi Di Maio, the leader of the anti-establishment Five Star Movement, and Matteo Salvini, the head of the far-right League, met the Italian President Sergio Mattarella on Monday to secure his approval for their Eurosceptic alliance. They proposed Giuseppe Conte, a little-known university professor with scant political experience and no power base of his own, as their compromise candidate to lead the populist government. Mr Mattarella, however, did not immediately give Mr Conte a chance to lead the government, suggesting he may harbour some doubts about his ability to contain personal and political rivalries between Mr Di Maio and Mr Salvini (the Five Star leader had long held out hope that he would become prime minister, but he had been blocked by Mr Salvini).
The governmental program includes a €780 a month basic income for poor families, tax cuts for companies and individuals, the repeal of pension reforms introduced at the height of the 2011 debt crisis, a crackdown on immigration and withdrawal of EU sanctions on Russia. Five Star and the League dropped demands for the European Central Bank to cancel up to €250 billion in Italian debt, which had appeared in an earlier draft document.
The Italian bond market was hit hard on Monday as investors reacted to the prospect of the anti-euro parties taking political power. The yield on the 10-year bond, which moves in the opposite direction to its price, jumped 18 basis points to 2.41 per cent. The premium over equivalent German debt, a widely watched indicator of eurozone political stress, hit 1.88 percentage points. The 10-year bond yield was down 9bp on Tuesday, while the main Milan equities index added 0.5 per cent after a 1.5 per cent fall on Monday. The benchmark 10-year sovereign debt yield climbed 8bp on Wednesday amid repeated bouts of selling. The 10-year yield has risen by 64bp since the start of this month.
Italy is particularly vulnerable to a sovereign crisis as it has the second highest debt ratio in the eurozone, at more than 130 per cent of GDP. Italy’s government debt is the largest in the European Union in euro terms. Growth is expected to be the slowest in the euro area this year and next. Unemployment consistently hovers around 11 per cent, far above the eurozone average of 8.5 per cent. Fitch, the rating agency, warned on Monday that the populist coalition poses a risk to the country’s credit profile as it is willing to push back against EU fiscal and monetary rules.
Mr Salvini is likely to be appointed interior minister to oversee a planned crackdown on immigration, while Mr Di Maio is expected to head the ministries of labour and economic development. If Mr Mattarella approves the team, the government will be sworn in and then face a vote of confidence in the two houses of parliament.
Photo: Alf Melin
