Two and a half months after an extraordinary general election, Italy is finally on the verge of getting a new government. 5 Star Movement and the League appear to form an anti-establishment coalition that would affect Italy's fragile public finances and increase tensions between Rome and its alliances in the euro area.
The two populist parties still have to complete their programs and pick a prime minister who would suit them both. Most importantly, they will need to win around Italian President Sergio Mattarella, who has signaled that he wants to play an active role in the formation of a government.
But gave 5 Star and the league can reconcile its differences, they should only be allowed to move on and steer. The populists have a democratic mandate, so it's time for their ideas to finally be tested ̵
Before the March election, the league and five-star leaped separately on two platforms full of generous giveaways. In their coalition negotiations, which began last week after a long deadlock, they could have watered down these promises to try to calm Italy's European partner's concerns. Tellingly, seems those who plan to just add them.
The agreement, which has not yet been concluded, seems to include: a dramatic reduction in retirement age; a steep decline in income tax; and a generous income support scheme for unemployed and low-paid. There is no detail about how this anti-elite dream team would pay for such convinced commitments.
The President of Italy and the rest of clearly see the euro area with alarms. According to the Monetary Fund's tax provisions, countries should use the current economic upturn to reduce the deficit, not increase it. Italy's sovereign debt – which accounts for more than 130 percent of national income – is a time bomb that has been temporarily defunced thanks to the quantitative easing of the European Central Bank. When the ECB calls QE, probably autumn, investors will obviously question how sustainable this debt pool is.
Nevertheless, a league / 5-star coalition would represent what Italians want. The two parties won more than half of the seats thanks to agendas that were indifferent to budget constraints and critical to EU financial management. If they can reach an agreement, then it was.
The President and the euro area have tools for keeping a new populist government in control. Italy has signed up for a long list of European treaties, which severely limit the economic policy of individual currency members. The country's constitution refers to the need to balance the budget over the business cycle. The President is entitled to veto any law that does not conform.
The new coalition, of course, has the opportunity to leave the euro area, if desired. Both parties have played with the idea. However, they have abandoned it for the moment because of the market spans that should arise. They could try to change the constitution, but it is a fragile process that requires a large majority or referendum. In contrast, they must balance their promises with the rules that Italy has chosen to follow.
The two parties will also find that ruling together is much more difficult than fighting alone. For years, Five Star Movement has been fighting on a platform that is vague enough to attract support from the left and right. It is now likely to trigger liberal supporters by forming an alliance with the league, an immigrant who admires Hungary's Viktor Orban. Parliamentary arithmetic is also difficult. In the Senate, the two parties only have a majority of six, which will require extraordinary discipline.
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James Boxell at jboxell @ bloomberg .net