[ROME ITALY] * ITALY LOOKS SET TO FINALLY GET A GOVERNMENT, LED BY A COALITION OF TWO EUROSCEPTIC POPULIST PARTIES, THE FIVE STAR MOVEMENT AND THE NORTHERN LEAGUE. * A LEAKED DRAFT POLICY PAPER ON THE TWO PARTIES' PLANS FOR GOVERNMENT SHOWED DISCUSSIONS ABOUT LEAVING THE EURO. * BOTH PARTIES HAVE DENIED THEY PLAN TO PULL OUT OF THE SINGLE CURRENCY BUT THE FACT THAT DISCUSSIONS WERE EVEN HELD IS A WORRYING SIGN FOR THE EUROZONE. * ITALY IS ONE OF THE KEY PILLARS OF THE PROJECT AND WITHOUT ITS FULL SUPPORT, THE EURO COULD BE ON SHAKY GROUND. ------------------------- After more than two months of deadlock, Italy is finally close to appointing a new government, led jointly by populist parties the Five Star Movement and the Northern League. A deal between the two is expected some time this week. Five Star, which is the single biggest party in the Italian system, fell far short of being able to govern alone but will lead the coalition. The League will be an unofficial junior partner in what will be a ruling coalition unlike any seen in a major European economy for many years. The coalition could, if circumstances dictate, end up pulling Italy out of the euro and threatening the stability — and possibly even existence — of the entire eurozone project. It's a slim possibility but one that cannot be ruled out, especially after a leaked agreement between the two sides showed discussions have taken place about Italy abandoning the single currency. Matteo Salvini, the League's leader, is thought to have been more forthright in his desire to abandon the eurozone, while Five Star's 31-year-old leader, Luigi Di Maio, is a highly pragmatic leader who has shifted his political allegiances frequently. The leaked report, published in part by the Huffington Post, shows the parties discussed a commitment to leave the euro but on Wednesday they issued a joint statement, hours after the draft was published, saying it was "old-version that has been significantly modified." Both parties specifically pushed back on the euro blueprint, saying they decided "not to call into question the single currency." HOSTILITY TO THE EURO Whether or not the parties push for an exit from the euro, the fact that such a proposal almost formed a part of their plan for government is a huge moment for the eurozone. Italy is one of the three most crucial members of the eurozone project, alongside France and Germany. Italy is the third biggest economy in the group and the largest in southern Europe. Perhaps the simplest way to imagine the eurozone is as a three-legged stool. Germany, France and Italy are the legs holding up the rest of the project. Remove any one of those three pillars and the stool falls over. That's a view held by Nobel Prize-winning economist Joseph Stiglitz, who back in 2016 said that a "disastrous" political event similar to the United Kingdom's decision to leave the European Union could trigger the collapse of the eurozone. "I think the most likely thing is something along the lines of a political cataclysmic event like Brexit," Stiglitz said at the time. "In other words, the eurozone’s member countries are democracies and one sees increasing hostility to the euro, which is, unfortunately, spilling over to a broader hostility to the broader European project and liberal values." FIVE STAR COULD CHANGE ITS MIND ON THE EURO [5-Star new leader Luigi Di Maio gestures during an interview with journalists in Rimini, Italy September 24, 2017. REUTERS/Max Rossi] Now that such a government is about to take control of Italy, the possibility of the Italian exit from the euro cannot be ruled out. While the coalition has ruled out an exit for now, Five Star has a track record of changing its political stripes at almost any moment if it seems that doing so will boost its popularity. The party in fact promised not to go into coalition with any other party when it was campaigning, something it now looks certain to go back on. Five Star's unique status as a party without a traditional left or right wing position allows it to be far more flexible, something it is keen to emphasise. It is variously anti-establishment, Eurosceptic, anti-immigration, and pro-green. If opposition to the European Union increases further — Italy ranked 23rd out of 28 in terms of individual support for the bloc in a recent study by Berlin-based think tank the European Council of Foreign Relations (ECFR) — it would not be a huge surprise to see Five Star go back on its pledge to back the euro. Italian Euroscepticism is seen as a major negative in the markets. The cost of borrowing in the country hit its highest level in two months on Wednesday after the proposals leaked. Investors were particularly spooked by a section where the nascent coalition floated plans to ask for €250 billion in debt forgiveness for the country. "A markedly Eurosceptic prime minister... as well as concrete support for the introduction of a parallel currency (so-called “Minibots”), would be major negatives, in our view," a note from Credit Suisse argued on Wednesday. DIFFERING POLICY GOALS The League and Five Star have numerous areas where they differ on policy, something which has made progress in coalition talks slow and arduous. The chart below, created by analysts at Nomura, shows where both stand on key policy issues, highlighting both their similarities and their differences as they prepare to govern together.[Five Star Lega Nord policy chart Nomura] SEE ALSO: ITALY IS THINKING ABOUT TAKING A $250 BILLION WRITE DOWN AND THAT HAS TRADERS STARTING TO FREAK OUT ABOUT GREECE Join the conversation about this story » NOW WATCH: There’s a major shift occurring that could signal the end of the historic bull market
 |
| READ THE ORIGINAL POST AT www.businessinsider.com |