Brussels calls on Italy to stay committed to the 'European path'

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai China

An investor looks at an electronic board showing stock information at a brokerage house in Shanghai China

Italy's new government, likely to be formally confirmed within the next few days, sets a perilous precedent for Brussels: it marks the first time a founding member of the European Union has been led by populist, anti-EU forces.

Italy appears on the verge of forming a radical, populist government some two months after March's election stalemate.

With such renewed political angst in a nation where there has been more than 60 national governments in the post-war era, concerns are growing again about the country's future.

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.

The parties' leaders, Luigi Di Maio of M5S and Matteo Salvini of the League (who counts the likes of Marine Le Pen and Viktor Orbán as his allies), were quick to say this leak was premature, and a later version of their contract showed the section on Europe had been much watered down. Mr. Mattarella granted them a few more days to try to hash out their differences.

"Although the two parties may eventually water down the proposals, the document reveals the true extent of their oddity, inexperience and off-track nature", wrote Lorenzo Codogno, of LC Macro Advisors, a consultancy based in London, in a note on Wednesday morning. "I think investors are recognising we are at the beginning of the beginning of this, so it's not anything to make dramatic portfolio moves or any significant bets on", said Katie Nixon, chief investment officer for the wealth management division of Northern Trust in Chicago.

Following the news, a leaked manifesto outlining Mr Salvini and Mr Di Maio's plans for forming a government threaten to spark fears of renewed challenges to the European Union after Brexit. The League is also pushing an ambitious overhaul of the justice system. Italian shares also fell 1.8 per cent on Wednesday.

As the likelihood of a populist government in Italy increases, the yield on Italian government bonds - a measure of investor confidence in the country - has climbed.

The euro was 0.05 percent higher at $1.1813 after sliding overnight to $1.1763, its lowest since December 18.

They also condemned the leak of the draft deal by HuffPost Italia and said the proposals, dated 09:30 on 14 May, were out of date.

Each party plans to consult its supporters over the weekend to see if they back the nascent government pact. "Nobody knows exactly how it will all play out". Though both draw support from young voters and those who oppose traditional political powers, their policies on fiscal matters and on the environment are often at odds.

"They are preparing excuses if they can not maintain all their promises, so they want to unleash a battle against the European Union", said Andrea Romano, a lawmaker from the centre-left Democratic party.

This would be the first time the 5-Star Movement has had a government role higher than the municipal level.

Back in the currency markets, sterling nudged up against both the dollar and the euro after a United Kingdom newspaper reported that Prime Minister Theresa May would tell Brussels that Britain was prepared to stay in the European Union's customs union after a transitional arrangement beyond 2021. Failure to form a government now would probably push Italy towards snap elections.

Italian far-right and anti-establishment leaders were locked in the final stages of negotiations over a coalition deal on Thursday that could end over two months of political deadlock.

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