Political risk rises in Italy as anti-euro rebels flirt with real power

It had been assumed that Silvio Berlusconi would control the Italian Right. Suddenly the EU could be looking at a Lega prime minister named Matteo Salvini who plays by very different rules

Large banks and hedge funds are quietly advising clients to brace for trouble ahead of the Italian elections in early March, warning that a late surge by anti-EU populist parties threatens to shatter Europe’s brief political calm…

The other upset is that the firebrand hard-Right Lega Nord has drawn neck and neck with Silvio Berlusconi’s Forza Italia and could be in the extraordinary position of picking the next prime minister under the coalition deal of the combined political Right, if they secure a combined majority as looks increasingly likely.

This would propel Lega leader Matteo Salvini – who calls the euro a “crime against humanity”– to the centre of European politics. “If we win by one vote, Salvini will be prime minister, it is as simple as that,” said Claudio Borghi, the party’s economics spokesman.

The Lega has not dropped its anti-euro platform. It still wishes to restore the lira but now prefers to move step by step with salami tactics, a sort of reverse “Monet Method”. It plans to issue tradeable “perpetual Treasury notes” to pay off contractors and government arrears, creating a de facto parallel currency within the euro that subverts monetary union from the inside. It vows to amend the Italian constitution to establish the primacy of Italian law over EU law, introducing a so-called “Karlsruhe clause” that mimics the posture of the German constitutional court…

Such a government would clearly be at daggers drawn with Brussels over everything from fiscal policy to the migrant crisis. Even if Forza Italia has the upper hand in a Right-wing coalition – still the most probable outcome – any such government is likely to pursue a range of policies that breach the rules of monetary union. Citigroup said plans for a flat tax would raise the budget deficit by 1.2pc of GDP.