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

039;Italy will be questioning the whole organisation of the eurozone and of the EU,' said political scientist Sergio Fabbrini

039;Italy will be questioning the whole organisation of the eurozone and of the EU,' said political scientist Sergio Fabbrini

Anti-establishment 5-Star Movement (M5S) leader Luigi Di Maio said Wednesday there was no going back on a government deal with the anti-migrant Euroskeptic League.

European Union rules limit government budget deficits to 3 percent of gross domestic product and debt to 60 percent of GDP and oblige governments to seek balanced budgets. Economists worry that such goals are unrealistic given that Italy is deeply in debt ― making up 132 percent of its GDP.

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 US President Donald Trump.

"In short, trust towards Italy is bound to face heavy tests under a M5S/LN government, even if the two parties will not be able to implement their program in full", he said.

The benchmark 10-year U.S. Treasury note yield held well above 3 percent after bursting through key technical levels on Tuesday.

"It is totally nuts".

Speaking to CNBC, the Investment Director at Fidelity International claimed Italy's new government coalition between Lega leader Matteo Salvini and Five Star Movement leader Luigi Di Maio will cause a huge fight with Brussels amid major European Union reform demands.

This will now be something to watch as populism is back on the agenda for markets where the coalition has radical ideas to free up billions of euros for tax cuts and welfare.

The yield premium investors demand for holding Italian bonds over top-rated German peers jumped to its highest since January as investors fretted about a confrontation between a new government and the European Central Bank over debt forgiveness.

Italy's partners however want to believe that the next government will be manageable.

Mr Mattarella on Monday gave the two parties yet more time to try to reach an agreement.

"They have already become more moderate and this will probably continue".

Mr Iannelli claimed the newly drafted demands would be "illegal" and not in compliance with the bloc's core Maastricht Treaty. "At this point, it is not clear", said Mary Ann Hurley, vice president of fixed income with D.A. Davidson in Seattle.

The news also pushed Italy's debt insurance costs in the five-year credit default swaps (CDS) market to 102 bps, the highest since end-March, according to IHS Markit.

Spreadbetters see Britain's FTSE opening 4 points lower, while Germany's DAX is expected to rise 13 points and France's CAC is seen gaining 10 points.

So far, ambitious plans from French President Emmanuel Macron have met with a cool reception in Berlin. Italy is the euro zone's third-largest economy.

A leaked draft of the coalition programme revealed the eurosceptic team will demand a renegotiation of Italy's European Union budget contributions, the dismantling of a 2011 pension reform that raised the retirement age, and an end to sanctions against Russian Federation.

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.

With tensions high, Valdis Dombrovskis, the vice-president of the European Commission, warned that Italy should maintain its commitment to gradually reduce the public deficit and debt. "The games at the table of big finance, who buys, who sells, who buys, who sells". We economists call this "fiscal dominance". "Not likely, but still." the official said.

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