A coalition between anti-establishment 5-Star Movement and the far-right League described before the election as the “nightmare scenario” and EU leaders are now preparing for changes that could cost the bloc billions to implement.
The EU will have to fight to keep its fiscal rules on taxes, welfare provision, and pension reform in place as the new government takes form.
Italy’s battle against the stringent terms placed on the country united angry voters against the EU in the run up to the election.
And now, ten weeks later the Italian coalition is taking shape after March’s inconclusive election.
League leader Matteo Salvini spent the weekend in talks with his 5-Star counterpart Luigi Di Maio, and told reporters the austerity measures and will be hard, if not impossible, for the EU to keep.
The cost of this renegotiation for the EU could total £109.75 billion (€124 billion).
Mr Salvini said: “We will need to renegotiate EU agreements to stop Italy suffocating.”
Before the election, 5-Star and the League both blamed the EU’s overbearing rules for Italy’s chronically weak growth, rising poverty, and voter resentment. Both parties promised to defy Brussels by spending more if they were elected.
In a scenario where both parties deliver their pre-election promise, the 5-Star’s flagship policy of a universal income for the poor was estimated by the party to cost around £14.99 billion (€17 billion euros) per year.
Similarly, the League’s hallmark scheme, a flat tax rate of 15 percent for companies and individuals, is estimated to reduce tax revenues by £70 billion per year (€80 billion).
Scrapping the unpopular pension reform would cost £13.22 billion (€15 billion), another £11 billion (€12.5 billion) is needed to head off the planned hike in sales tax, and the parties are also considering printing a new, special-purpose currency to pay off state debts to firms.
With changes on the horizon, Wolfgang Munchau, head of the London-based Eurointelligence think-tank, said: “If implemented, it would be the biggest shake-up of the Italian economic system in modern times.”
According to one expert, the fight against the EU is a win-win scenario for the new Italian government. Wolfango Piccoli, co-president of Teneo Intelligence, said taking on Brussels would be popular with Italian voters, and the new government had little to fear from the European Commission.
Mr Piccoli described the Commission as “very weak and on its way out”.
He said, with just a year of its term remaining, the Commission “can’t really do much other than put Italy’s finances under greater scrutiny, and markets don’t care about that.”
Markets are yet to react to the potential coalition but Francesco Galietti, head of the Policy Sonar political risk consultancy, described the nascent coalition’s economic policies as “a pretty spicy dish”, but added investors were pleased to see Italy moving closer to forming a government.