Italy's prime minister Giuseppe Conte, August 29 2019. Picture: AFP/ANDREAS SOLARO
Italy's prime minister Giuseppe Conte, August 29 2019. Picture: AFP/ANDREAS SOLARO

Rome — Italy’s president asked Giuseppe Conte to lead a coalition of the Five Star Movement and opposition Democratic Party (PD) on Thursday, a move could that could improve Italy’s fractious relations with the EU.

Markets welcomed the prospect of a quick end to a three-week political crisis triggered by Northern League leader Matteo Salvini, who pulled his hard-right party out of its governing alliance with Five Star after weeks of public bickering.

Salvini had wanted fresh polls to capitalise on his party’s success in European elections but his plan backfired as Five Star and the PD, lagging behind the League in opinion surveys, set aside their long-standing antipathy to form a government.

Italy’s 10-year bond yields dropped below 1% for the first time on record, significantly lowering borrowing costs for the nation and easing the pressure on its burgeoning fiscal deficit.

Conte, who said he would present a cabinet list to the president in the coming days, said his priority is to draft a 2020 budget. “We must immediately get to work and draw up a budget to avert the VAT hike, protects savers and offers solid prospects for economic growth and social development.” 

VAT will rise from January 1 unless the government can find €23bn elsewhere.

The creation of a new government is not yet a done deal, however, and the two parties still need to agree a shared policy platform and divide up cabinet posts.

In a further complication, Five Star has promised to put the deal with the PD to an online vote of its members. Many Five Star supporters oppose a pact with the centre-left and a “yes” vote is not a certainty.

Market reaction

However, investors brushed off those concerns. Conte was seen as a voice of reason within the previous Five Star/League coalition and investors are betting Italy will get a fiscally prudent government that will avoid confrontation with Europe.

According to the financial daily Il Sole 24 Ore, an early draft of the incoming coalition’s policy platform would see it ask the EU for flexibility on the 2020 budget deficit to “reinforce social cohesion” in Italy.

The EU imposes budget rules on member states to ensure financial stability in the bloc. It has had a testy relationship with Rome under the outgoing administration, with League leader Salvini blaming EU rules for impoverishing Italians. Salvini had promised swingeing tax cuts for 2020 that economists warned could put unsustainable pressure on Italy’s towering debt mountain.

The PD leader Nicola Zingaretti said the priority for the new coalition will be to revive the stagnant economy. “As soon as it takes office, the government will have to act very quickly to relaunch the country — school, environment, infrastructure, investment to create work,” he said in a statement.

Italy’s battered blue-chip index was headed for its best weekly performance in six months on news of Conte’s re-appointment.

“We think it will be less challenging to agree on an agenda between [Five Star] and PD because the priorities both political forces have set out seem broadly consistent in many areas, ranging from fiscal policy to Italy’s relationship with the EU to a focus on a green economy,” UBS Wealth Management Italy’s Matteo Ramenghi said.

German finance minister Olaf Scholz said Conte’s appointment was good news for Europe, adding: “I’m glad to see that the government crisis in Italy seems to have come to an end now and that a stable and new, progressive government can take the helm.”

Conte, a quietly spoken academic, has enjoyed high poll ratings since he was plucked from relative obscurity 14 months ago to become premier. While he has no political affiliation he is considered close to Five Star.