Italian Populists Seal Pact 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. Salvini said he’ll tell President Sergio Mattarella when they meet on Monday.

Italian assets were jolted and their moves sent ripples across global markets. Government bonds dropped, pushing the 10-year yield up by as much as 11 basis points to a 10-month high of 2.22 percent, and weighing on securities from Portugal and Spain. Banks led losses as the FTSE MIB index of shares sank 1.1 percent for the worst performance in Europe, while credit-default swaps on the debt of both the government and financial institutions rose. The euro weakened for a sixth-straight day against the Swiss franc as investors sought haven assets.

The prospect of the first populist government in a founding member will send tremors through the European Union’s political class as well, after it 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.

“Underneath the surface, the question of what will be the relationship between the new government and the EU is really the fundamental one,” former Italian Prime Minister Mario Monti said in a Bloomberg Television interview. “Even more important than the figures in the program, is whether there is intellectual and political acceptance on key points that are in the Italian constitution and the EU laws and treaties.”

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 is back in 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.

©2018 Bloomberg L.P.

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