Markets still rattled over Italy's League-Five Star "contract"

Sergio Conner
May 18, 2018

The anti-establishment 5-Star Movement (M5S) on Friday started an online vote of members about the government contract it has agreed with the League.

Also yet to be signed off were a register of religious leaders, a demand that all religious sermons be conducted in Italian, and that local consultations take place before any new mosques are opened.

Carlo Cottarelli, a former executive director at the International Monetary Fund, and who now heads an observatory of Italy's public finances, said in a Twitter post that the program's expansionary measures would cost between 109 billion euros ($129 billion) and 126 billion euros.

Di Maio is still seeking the premiership for himself, according to another Five Star official.

While few people see that as either a realistic proposal or one that would remain in the coalition's agenda, the tone of the new government's stance toward euro zone rules was seen as confrontational and spooked some investors.

Instead of debt forgiveness, what the parties want is for the European Union not to account for bonds bought by the ECB under QE when calculating a country's official debt levels for the purposes of the EU's Stability Pact, Borghi said. But with Italy's public debt at more than 130% of GDP, the measures will be hard to achieve, undoubtedly leading to clashes with the EU.

News of the draft accord has caused concern in Brussels, where European Commission Vice President Valdis Dombrovskis told the EU parliament on Thursday that Italy's new government should stick to fiscal discipline and keep reducing public debt. The FTSE MIB benchmark stock index was down 2.3 per cent, underperforming the Stoxx Europe 600 index that was up 0.2 per cent. Italy's 10-year government bond yield climbed to 2.12 per cent, up 17 basis points on the day, the biggest upward move for more than two years.

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"This is our message to the new government".

Italy's borrowing costs have been rising as details of the accord emerge. "It's important to stay the course", Mr Dombrovskis said.

Outgoing Prime Minister Paolo Gentiloni told European Union leaders in Bulgaria that he and other leaders were anxious that fundamental issues such as the need to safeguard public accounts were now up for political discussion.

The plan promised to introduce a 15% flat tax rate for businesses and two tax rates of 15% and 20% for individuals - a reform long promoted by the League. Neither Salvini nor Di Maio wants the other to get the job.

There was still no word on the thorny issue of who would be prime minister.

The League-Five Star draft document also states their "intention to oppose" worldwide trade treaties such as the EU-Canada Comprehensive Economic and Trade Agreement (CETA), the Transatlantic Trade and Investment Partnership (TTIP), and ongoing negotiations to grant China market economy status (MES).

The "contract" also calls for "appropriate recourse to deficit spending" to force the economy to expand, and suggests that sovereign bonds held by the European Central Bank (ECB) should be "excluded from debt-to-GDP calculations" for all EU member states.

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