No takers for the Italian job: Coalition parties bid for more time

Italy's new government has yet to be formed, in part because neither leader of the two main parties wants to be Prime Minister.

The populist parties Five Star Movement and League have today asked for more time to complete discussions for a coalition.

On Sunday night, Luigi Di Maio of Five Star, which received the most votes in March's election, said they had made good progress and agreed to form a partnership.

But neither Di Maio nor League's leader Matteo Salvini wants to become Prime Minister.

Following a meeting with Italian President Sergio Mattarella today, the two parties will continue to be locked in discussions to agree all the terms of the coalition programme.

If a government is formed, some economists warn that expensive policies such as universal basic income, flat income tax and pension reforms could impact the Eurozone.

Mihir Kapadia, chief executive of Sun Global Investments told City A.M.: "This means that pursuing such policies are likely to be the height of fiscal irresponsibility and they would bring Italy into a collision course with Brussels over the EUs budget deficit rules – which seek to limit a members budget deficit as a percentage of GDP to three per cent."

But he added that Brussels was likely to assume that Italy would not leave the EU. "Even if it attempted to do so I think its political establishment would not manage an exit," he said.

Andrew Sentance, senior economic adviser to PwC, told City A.M. that Italy is unlikely to have a major impact on European development.

Read more: Eurozone inflation falls to add to European Central Bank QE quandary

"They have weathered all sorts of political ups and downs in Italy," he said. "They are not the big players in Europe, particularly when it comes to economic and financial events.

"I am struggling to find any example from the last 50 years where developments in Italy have been decisive for the EU. People will look at Italy and say: this is Italy, their political situation is volatile."

Markets have been relatively calm since the election, with many analysts putting this down to scepticism that the government would be able to implement major policies.

Kay Neufeld said there are "a lot of risks" in the current situation, but that market reaction could depend on the European Central Bank (ECB).

"If it is perceived that the ECB is more powerful and has more weight we wont see a big reaction," he said. "If that balance tips and if we see these risks emerge forcefully, we could see quite a sudden reaction with a sudden fall in the Euro and rising government bond yields for Italy."

Read more: Italy's Five Star and League parties approach coalition after talks

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