Italy's incoming eurosceptic government sparks crisis fears in Brussels

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Italy's incoming eurosceptic government sparks crisis fears in Brussels
Matteo Salvini, leader of the far-right party League (Liga) speaks to the press on Monday. Photo: Andreas Solaro/AFP

Fears of a new European crisis grew on Tuesday over Italy's incoming eurosceptic government, which has vowed to reject the Brussels austerity diet and to crack down on immigrants.


Governments and markets have suddenly become unsettled as the prospect of populists taking the helm of the EU's fourth biggest economy suddenly becomes a reality after months of deadlock. A period when the rest of the world seemed to be in denial finally seemed to be over as Italy's president was tasked on Tuesday on whether to approve little-known lawyer Giuseppe Conte as prime minister.

The anti-establishment Five Star Movement and the anti-immigrant League -- together the EU's worst nightmare -- put his name forward to represent the biggest winners from March's election.

"There are some things there that are worrying, yes," EU Trade Commissioner Cecilia Malmstrom told reporters in Brussels on Tuesday when asked about the Italian situation.

Fear number one is that Italy, a founder member of both the EU and the euro, is set to irk financial markets and trigger a new eurozone crisis by refusing to stick to public spending and debt targets set by Brussels. The bloc's enforcer for the euro, European Vice President Valdis Dombrovskis, issued a tough public warning to the incoming Italian administration to pursue a "responsible" budget policy.

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Giuseppe Conte (R) shakes hands with Five Star leader Luigi Di Maio. Photo: Filippo Monteforte/AFP

'Stay on course'

"We view it as important that the Italian government remains on course in pursuing a responsible budget policy," Dombrovskis told the German business daily Handelsblatt.

The no-nonsense Latvian noted that Italy has the second highest level of state debt after Greece, explaining why Brussels is anxious that Rome continues to follow the EU rules. Dombrovskis noted that the coalition's plan to drastically slash taxes and reverse pension cuts will be costly.

"We can only advise it to stay on course in terms of economic and fiscal policies, to stimulate growth through structural reforms and to keep the budget deficit under control," said Dombrovskis.

French Economy Minister Bruno Le Maire meanwhile warned on Sunday that the "financial stability of the eurozone will be threatened" if Italy "takes the risk of not respecting its commitments on debt and the deficit."

The Frenchman also warned that Italy still had to clean up its debt-laden banks, whose health has long been a worry for the eurozone. The spectre of Greece hovers over everything, with memories still fresh of how the leftist Syriza government brought the country to the brink of a "Grexit" from the euro in 2015 with similar vows to resist EU austerity -- although in that case Athens finally backed down.

It is also not the first time that the prospect of an Italian crisis has spooked the markets -- in 2011 longtime premier Silvio Berlusconi was toppled by fears that it could be overwhelmed.

"Although we have to brace ourselves for significant noise, including clashes between Rome and Brussels, a truly disruptive crisis is probably not on the cards for now," Berenberg analyst Holger Schmieding said.

"However, if highly-indebted Italy loosens the fiscal reins and reverses some recent reforms... the country would become vulnerable to a debt crisis if and when the next cyclical recession exposes the country's weaknesses."

'Worst case'

The fears growing in Europe are not just linked to the economy, however. Alarm is also rising about the success of Five Star's anti-EU platform and the anti-immigrant stance of the League.

They have revived fears in Brussels and other capitals that Europe has failed to roll back the wave of right-wing populism that sparked the 2016 Brexit vote as successfully as first thought.

Those fears had been sidelined after the Europe-loving French President Emmanuel Macron beat far-right candidate Marine Le Pen in elections last year, but now the spectre has returned.

European Commission chief Jean-Claude Juncker warned ahead of the Italian elections that a victory for them would be a "worst-case" scenario -- a remark that itself sent the markets tumbling.

The doom-laden warnings have wound up Italy's new powers. "Let us get started first, and then you can criticize us," Luigi Di Maio, the young Five Star chief, said Monday.

By Danny Kemp


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