A new Italian government was sworn in Friday in Rome after months of political turmoil that unnerved investors and sparked worries that the eurozone’s third-largest economy could ditch the currency.
Two major populist parties, the Five Star Movement and the far-right League, have emerged from the tumult to form an administration.
The parties have dropped some of their most explosive campaign pledges, such as calling for a referendum on whether Italy should abandon the euro, or leave the European Union.
Analysts say they’re planning tax cuts and a spending binge that could contain the seeds of a new European crisis.
Italy is a founding member of the European Union and the eurozone. But years of economic stagnation and lack of reform have seen its government debt soar to 132% of GDP, the second worst ratio in the region after Greece.
The country has agreed to abide by EU budget rules designed to keep the currency stable — but the populists want those rules reviewed. Meanwhile, their platform doesn’t explain how their spending plans will be paid for.
The populists envision a minimum basic income of €780 ($917) a month for the poorest Italians, funded by the state. The Five Star Movement said during the campaign that the basic income would cost €15 billion ($18.5 billion) a year.
Tax cuts would likely take a further bite out of Italy’s government finances. Details are thin, but the two parties want to introduce new income tax rates of between 15% to 20%.
Ratings agency Moody’s warned last week it could cut Italy’s credit rating — already just two notches above “junk” status — because the populists’ plans risked weakening its fiscal position and stalling efforts to reform the economy.
The Italian economy is big enough to throw the entire eurozone into disarray if that happens. It accounts for about 15% of eurozone GDP and 23% of the region’s government debt. Greece has just over 3% of eurozone public debt.