Italy's rival anti-establishment parties — the populist Five Star Movement (M5S) and the nationalist League (Lega) — have formed a "eurosceptic" coalition government.
The new government has pledged to pursue a host of populist policies, including reclaiming national sovereignty from the European Union over issues ranging from border protection and immigration to economics and finance. For now, however, it has abandoned previous plans to hold a referendum on whether Italy should abandon the euro.
The viability of a M5S/Lega government initially was thrown into doubt after Italian President Sergio Mattarella vetoed their eurosceptic choice for finance minister: Paolo Savona, an 81-year-old former industry minister who has called Italy's entry into the euro a "historic mistake."
M5S/Lega reached a compromised by nominating Giovanni Tria, an economics professor who holds politically correct views on the euro, to head the finance ministry. Fittingly, Savona will become Italy's new Minister for European Affairs.
The new government, which was sworn in by Mattarella on June 1, will be headed by Prime Minister Giuseppe Conte, a little-known law professor with no experience in politics, and two deputy prime ministers: M5S leader Luigi Di Maio, who also becomes minister for economic development and labor; and Lega leader Matteo Salvini, who also becomes minister of the interior. The cabinet will have 19 ministers in all.
The government's program is outlined in a 39-page agreement called "Contract for a Government of Change." A two-page synthesis closely resembles U.S. President Donald J. Trump's "Contract with the American Voter."
The new program pledges: a flat tax; pension reform; a basic income; increased retirement and maternity benefits; a crackdown on government corruption; swift deportations of illegal migrants; increased defense spending; making Italy a "privileged partner" of the United States; and a renegotiation of the EU treaties involving monetary policy.
In the past, M5S leaders have repeatedly stated that they would like to hold a referendum on eurozone membership, but the current program does not call for a unilateral exit from the euro. Di Maio has said that for now, he simply wants to renegotiate EU budget regulations that he says are crippling the Italian economy.
Italian GDP is forecast to grow by just 1.5% in 2018, the same level as in 2017, making it the worst performer in the 19-nation euro zone.
Italy also holds the world's third-largest public debt, totaling €2.3 trillion ($2.7 trillion). Italy's current debt-to-GDP ratio is 130% of GDP, the highest in the eurozone after that of Greece.
During its campaign, M5S pledged to raise the budget deficit to fund welfare spending and tax cuts aimed at boosting growth. This, coupled with the prospect of having a eurosceptic finance minister, sent financial markets into a frenzy and self-righteous European officials into attack mode.
On May 29, EU Budget Commissioner Günther Oettinger said that financial markets would teach Italian voters a lesson not to pick left-wing or right-wing populists:
"Even now, developments on bond markets, the market value of banks, and Italy's economy in general have darkened noticeably and negatively. That has to do with the possible government formation. I can only hope that this will play a role in the election campaign and send a signal not to hand populists on the right and left any responsibility in government."
Lega leader Salvini lashed out on Twitter:
"Crazy, in Brussels they are without shame. The EU Budget Commissioner the German Oettinger says the markets will show Italians the right way to vote. If that isn't a threat...I am not scared!"
M5S leader Di Maio wrote:
"Markets will teach you to vote. The words of the European Commissioner #Oettinger are absurd. These people treat Italy as a summer colony where the come to spend their holidays.... a government of change will [soon] be born and in Europe we will finally be respected."
Oettinger apologized: "I did not mean to be disrespectful." European Commission President Jean-Claude Juncker issued a statement: "Italy's fate does not lie in the hands of the financial markets.... The Commission is ready to work with Italy with responsibility and mutual respect. Italy deserves respect."
Two days later, at a conference in Brussels, Juncker said that Italians should stop blaming the European Union for its economic problems and instead work harder and be less corrupt: "Italians have to take care of the poor regions of Italy. That means more work, less corruption, seriousness."
Salvini responded on Facebook: "Italians corrupt and lazy? Shameful and racist words, with the next government we will see we get the rights and dignity of 60 million Italians respected. They expect collaboration, not insults from Europe."
The continued patronizing by EU officials has contributed to the rise of populism in Italy and feeds popular support for the euroscepticism embraced by M5S and Lega.
Although financial markets have reacted positively to the appointment of Tria, who has said that he does not want to quit the euro, further spats between Brussels and Italy's new populist government loom large.
In addition to its deficit-busting pledges on spending and tax cuts, the new government is likely to clash with the EU on border control and immigration.
The M5S/Lega coalition has promised to improve border security, build more detention centers and accelerate the deportation of up to 500,000 illegal immigrants. The coalition has also called for renegotiating the so-called Dublin Regulation, a law that requires people seeking refuge within the EU to do so in the first European country they reach. Italy's geographic location means that it has borne disproportionate burdens with illegal immigration from Africa and the Middle East, but other EU member state are likely to resist changes that would require them to share the burden.
Prime Minister Conte vowed that his government will complete a full five-year mandate and implement its program: "We will achieve the objectives of this contract." The new government is the 67th in Italy in the last 70 years.
The creation of a M5S/Lega government is certain to inspire populist parties elsewhere in Europe. "You are the first guys who can really break the left and right paradigm," Stephen K. Bannon, an architect of President Trump's populism, told Salvini. "You can show that populism is the new organizing principle."