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ING research team assess the latest developments from Italy.

“Italy’s populist Five Star Movement and the far-right League have sent jitters across markets with their proposals to form a government on an openly euro-sceptic agenda. The President’s veto of a proposed Euro-sceptic finance minister at one point threatened a constitutional crisis.”

“Concerns that populists might consider the idea of issuing mini-BOTs, a short-term debt instrument often described as a disguised parallel currency, have especially fanned investor fears over Italy, where support for the EU is relatively low.”

“So far a crash in Italian debt markets have pulled populists back from the brink, and at present, their leaders are trying to form a less confrontational government. Yet, the prospect of fresh elections early next year remains.”

“The degree to which financial market discipline curtails populist policies – and Brussel’s stance to draw the string from populist support – will be key in determining Italy’s political path.”