Italy's Five Star unveils programme for govt with far-right

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As recently as Monday, the Five Star Movement and the League were discussing proposals for a new government that included a demand that the European Central Bank cancel €250 billion of Italian government debt, tax cuts and welfare spending increases that could raise the government deficit by as much as 6 per cent of gross domestic product, a renegotiation of Italy's European Union budget contributions and changes to EU Treaties to allow countries to quit the euro.

"There is a real danger that the new Italian government could, through its irresponsible economic policies, set the stage for the next euro zone crisis", a second senior official involved in euro zone policy-making said. "I'm very happy", wrote Five Star leader Luigi Di Maio on Facebook.

Late on Tuesday, a draft coalition program for the anti-establishment 5-Star Movement and the far-right League leaked.

Both parties have a history of Euroscepticism. 5-Star has moderated its position considerably in the a year ago, rowing back on a previous plan to hold a referendum on Italy's membership of the currency bloc. 5-Star has moderated its position over the previous year, but the League still wants to leave the eurozone as soon as politically feasible.

Bond markets have fallen this week in anticipation of an agreement with the 10-year spread reaching 158 basis points earlier on Thursday.

"The more they insult us, the more they threaten us, the more they blackmail us, the more desire I have to embark on this challenge", Salvini said, referring to his party's critics in Brussels, Rome, and beyond.

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A plan to scrap an unpopular pension reform would cost 15 billion euros and another 12.5 billion would be needed to head off an automatic hike in sales tax due for next year.

The two parties won more than 50% of the March vote between them as they look to lead the eurozone's third largest economy.

Matteo Salvini's League and Five Star emerged as the big winners from the March 4 general election as voters issued a rebuke to mainstream pro-EU parties amid widespread dissatisfaction with weak economic growth and surging migration.

Outgoing Italian Prime Minister Paolo Gentiloni told a meeting of European Union leaders in Bulgaria that he and other leaders were anxious that fundamental issues such as the need to safeguard public accounts were now up for political discussion.

French President Emmanuel Macron said the nascent Italian government was made up of "heterogeneous and paradoxical" forces, but expressed confidence that Mattarella would ensure Italy continued to work constructively in the EU. The League's hallmark scheme, a flat tax rate of 15 percent for companies and individuals, is estimated to reduce tax revenues by 80 billion euros per year. Prime Minister Silvio Berlusconi was toppled in 2011 as a former European Union commissioner and economics professor Mario Monti was installed as his "technocratic" replacement after the Union decided the country had not been run to their satisfaction. Neither Salvini nor Di Maio wants the other to get the job. It might also dismay Italian President Sergio Mattarella, who has repeatedly stressed the importance of maintaining a strong, pro-European stance.

Both parties plan to consult supporters over the weekend to see if they back the government pact. The policy programme will probably be published on Thursday, 5-Star said.

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