Giuseppe Conte. Picture: AFP/FABRICE COFFRINI
Giuseppe Conte. Picture: AFP/FABRICE COFFRINI

Rome — Italy’s anti-establishment Five Star Movement and the centre-left Democratic Party (PD) clinched a deal on Wednesday to form a new government and stave off elections in the eurozone’s third-largest economy, though some uncertainties remained.

Five Star said the coalition would be led by outgoing prime minister Giuseppe Conte, who had resigned following the collapse of the populist government earlier in August.

The deal between two historic enemies is set to put an end to what Italian newspapers have dubbed “the craziest crisis ever”.

Italian President Sergio Mattarella summoned Conte for talks early on  Thursday, at which point he is expected to give him a mandate to form a government.

Once Conte is sure he has a working majority, the new government will face a confidence vote in parliament.

Trump endorsement

Five Star leader Luigi di Maio said at the presidential palace in Rome that the endorsement on Tuesday of Conte by US President Donald Trump “had shown us we were on the right path”.

The parties had been bickering over whether Conte — a softly spoken former academic chosen as a compromise prime minister in 2018 — should lead a new coalition or whether a fresh face would better signal a fresh start.

Italy’s 10-year bond yield had fallen to a record low on Wednesday as hopes of an accord grew.

There was talk in the market of “a pro-European government with a finance minister from the Democratic Party, which would be pro-market and pro-EU”, said Aurelien Buffault, head of bond operations at Meeschaert Asset Management.

This was seen as “very positive” and explained why investors were piling into Italian government debt, he said.

Di Maio has warned, however, that any deal with the PD would still have to be approved by party members in an online vote.

Lorenzo Castellani, political science professor at Rome’s Luiss university, said that some “obstacles” to the new government had yet to be overcome, from the division of cabinet posts to the M5S online vote.

If Five Star’s online members “should vote against the deal … it would spark a very serious diplomatic incident”, he said. “In Italy, anything can happen right up until the confidence vote in parliament.”

Castellani said the vote on Five Star’s “Rousseau” platform could take place as soon as Friday.

Political watchers have warned some in Five Star’s base may attempt to thwart an alliance with the “enemy”. The clock has been ticking to ease the political turmoil, with Italy — grappling with a huge debt mountain — under pressure to approve a budget in the coming months.

If it fails to do so, it could face an automatic rise in value-added tax that would hit the poorest families the hardest and could plunge the country into recession.

Had the PD and Five Star been unable to form a solid majority, the president would probably have called an early election for November.

Far-right leader Matteo Salvini, who triggered the crisis on August 8 when he withdrew his League party from the governing coalition with Five Star, said the new set-up would be fragile and unlikely to last.

“So we have to wait six months or a year to win? We’re in no hurry,” he said.

Analysts have warned a Five Star-PD deal could favour Salvini in the end, should the hastily forged accord come undone over the coming months.

Both Five Star — which had sworn never to ally with traditional parties — and the centre-left could lose support for getting into bed with a former foe.

Should that happen, Salvini “will be well placed to swoop to power when the Italian economy hits what the German IFO survey, and the yield curve, are flagging as serious problems ahead”, said Michiel van der Veen from Rabobank.

AFP