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European stocks drop as trouble brews between Rome and Brussels

"Italy is once again becoming a problem for the eurozone," analysts said on Tuesday as a fresh political row brews over Italy's budget deficit.

European stocks drop as trouble brews between Rome and Brussels
A "debt clock" screen displaying Italy's public debt in 2018. Photo: FILIPPO MONTEFORTE / AFP

European equities slid Tuesday as investors tracked a brewing political fight between Brussels and Rome, and continued to digest the outcome of the region's parliamentary elections, dealers said.

Milan's stock market was the worst performer in Europe, sinking by 1.2 percent as Italian debt concerns returned to the fore.

READ ALSO: Italy's budget battle with Brussels: What you need to know

“Italy is once again becoming a problem for the eurozone,” noted analyst Konstantinos Anthis at trading firm ADSS.

However, losses were capped elsewhere after a much-feared surge in populist groups largely failed to materialise in European Parliament elections.

“European stock markets are in the red as Italian government bond yields have ticked up over a fear for a political fight between Rome and Brussels,” said analyst David Madden at CMC Markets UK.

“The EU has warned the Italian government they could be fined… for failing to curb their debt levels, and Italy's joint deputy prime minister Matteo Salvini declared he will use 'all his energies' to fight the EU's rules.”

Matteo Salvini. Photo: AFP

Salvini said on Tuesday he expected Brussels to slap Rome with a three billion euro fine over the country's rising debt and structural deficit levels.

“At a time when youth unemployment touches 50 percent in some regions… someone in Brussels is demanding, under the old rules, a fine of three billion euros,” he told RTL 102.5 radio.

“All my energy will go into changing these rules from the past,” said Salvini, who has been emboldened after his far-right League party won more than a third of the vote in Sunday's European Parliament elections in Italy.

The European Commission is expected to start disciplinary steps against Italy on June 5 by opening an excessive deficit procedure which could hand Italy a fine of up to 0.2 percent of the nation's GDP.

Italy's public debt is a big problem, sitting at 132.2 percent of the country's GDP in 2018 – way above the 60 percent EU ceiling – and expected to hit a record high in 219.

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ITALIAN ELECTIONS

Italy’s hard right set for election victory after left-wing alliance collapses

An Italian centre-left election pact broke down on Sunday just days after it was formed, leaving the path to power clear for the hard-right coalition.

Italy’s hard right set for election victory after left-wing alliance collapses

The alliance between Italian centre-left parties was left in disarray on Sunday night, potentially meaning a landslide victory for the hard-right coalition at early general elections in September.

The leader of the centrist Azione party withdrew support for the left-wing coalition led by the Democratic Party (PD) just five days after the two joined forces, saying it could not work with left-wingers brought in to boost the alliance.

Carlo Calenda, leader of Azione, withdrew his support on Sunday after PD made another pact with smaller left-wing parties including the radical Sinistra Italiana, and new green party Europa Verde.

“You cannot explain (to voters) that to defend the constitution you make a pact with people you know you will never govern with,” Calenda told newspaper Corriere della Sera.

The news was greeted with jubilation by hard-right League leader Matteo Salvini, who tweeted: “On the left chaos and everyone against everyone!”

Giorgia Meloni, leader of the neofascist Brothers of Italy party (FdI) mocked a “new twist in the soap opera of the centre-left.”

READ ALSO: Italy to choose ‘Europe or nationalism’ at election, says PD leader

Analyists predict the centre-left split could hand the right-wing bloc a landslide victory at the election on September 25th, with Meloni tipped to become Italy’s first female prime minister.

Italy’s political system favours coalitions, and while Meloni has a strong alliance with Salvini’s League and Silvio Berlusconi’s Forza Italia, Letta is struggling to bring together the disparate  progressive parties.

The PD is neck and neck with Brothers of Italy in the latest opinion polls, but even in partnership with Azione, the group most recently polled at 33.6 percent, compared with 46.4 percent for the right.

Political commentators said the only hope PD has now of posing a credible threat to the right-wing alliance would be by partnering with the Five Star Movement.

READ ALSO: Why has Italy’s government collapsed in the middle of summer?

However, Letta has repeatedly said this is out of the question, as he blames M5S for triggering the political crisis that brought down Mario Draghi’s broad coalition government.

“Either PD eats its hat and seeks alliance with M5S to defeat the right-wing coalition, or it’s hard to see how the right can possibly lose the forthcoming election,” Dr Daniele Albertazzi, a politics professor at the University of Surrey in England, tweeted on Sunday.

Early elections were called after Draghi resigned in late July. His government currently remains in place in a caretaker role.

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