Italian Populists Seal Agreement to Challenge EU Establishment

(Bloomberg) -- Italy’s populist leaders sealed a coalition agreement that aims to ramp up spending on the poor and slash taxes in a direct challenge to the European Union establishment.

After 10 days of negotiations, 31-year-old Five Star leader Luigi Di Maio said Friday that he’s settled the final issues with Matteo Salvini, 45, of the anti-immigrant League and their policy platform is ready for party members to vote on. The program, posted online, demands a review of EU budget rules, an end to economic sanctions on Russia and pledges to roll-back pension reforms that raised the retirement age.

The program may cost as much as 126 billion euros ($149 billion) according to an estimate by former International Monetary Fund official Carlo Cottarelli based on an earlier draft.

The parties still haven’t said who they’ll nominate as prime minister.

Italian bond yields jumped, with the 10-year spread over German bunds widening by 7 basis points to 155 basis points.

The prospect of the first populist government in a founding member will send tremors through a European Union that scraped through the euro-area debt crisis and found fragile unity after the shock of Brexit, only to be confronted with multiple challenges by U.S. President Donald Trump.

Old Guard Implodes

The two political outsiders seized the initiative at March’s election as the old order buckled. The center-left Democratic Party of ex-premier Matteo Renzi suffered its worst ever result. Silvio Berlusconi, 81, was eclipsed as leader of the center-right by the more hard-line League. Five Star became the single biggest party.

Attention will now shift to their party votes, with Di Maio promising that Five Star members will have an online vote, while the League plans to set up ballots in piazzas across the country.

If the voters back the two leaders’ efforts, the ball will go into President Sergio Mattarella’s court. Di Maio and Salvini are expected to report back to the head of state, whose task it is to name a premier, early next week. Mattarella, 76, a former constitutional court judge, has signaled he could play an interventionist role in vetting their policy plans, as well as their candidates for the premiership and ministerial posts.

If the Five Star-League plan were to fall apart, Mattarella could revert to an earlier idea to appoint a non-partisan premier, though both populist groups have said they’ll use their blocking majority to shoot down any such candidate and trigger new elections.

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