Political turmoil spurred snap elections in Italy in 1994, 1996 and 2008. Another one appeared to be in the offing when Matteo Salvini and Luigi Di Maio, the unlikely bedfellows who sparred constantly while sharing power in a populist coalition, finally broke up. But the unexpected pairing of Di Maio’s anti-establishment Five Star Movement and the establishment center-left Democratic Party, which formed a coalition in September, averted an early vote and resurrected the rule of Prime Minister Giuseppe Conte. It also altered Italy’s posture on several issues important to the European Union.

1. How significant is the change in the governing coalition?

During the 15 months under the populist coalition of Five Star and Matteo Salvini’s League, Italy challenged the European Union on everything from the budget to immigration, with anti-euro rhetoric keeping government bond yields at multi-year highs. Now that the pro-EU Democrats have replaced Salvini’s party in the ruling coalition, investors are less worried that Italy’s finances will be out of control, as Italy’s stance toward the EU has turned on a dime.

2. How so?

Italy’s government is now talking up its commitment to Europe, and it named a finance minister with years of experience at European institutions. (The feeling appears mutual: The EU appointed former Italian Prime Minister Paolo Gentiloni as its commissioner of economy and financial affairs, in charge of monitoring national budgets.) The first budget of the Conte II government aims to deliver a minimal fiscal expansion, and to do so without triggering a confrontation with Brussels. But it finances measures mainly with deficit and uncertain revenue from a crackdown on tax evasion, while Italy’s main problem, debt, is not directly tackled. Still, investors have been won over so far, and yields have plummeted.

3. Will this government last?

That’s a big unknown. The pro-EU Democrats and anti-establishment Five Star have long been arch-enemies and are quarreling bitterly. Italian governments in general are notoriously short-lived. But Five Star and the Democrats have reasons to try to stick together for as long as they can, even all the way until the next regularly scheduled election in 2023, if possible. One common desire is to delay giving Salvini and the League a chance to reclaim power, since polls show that they would likely win early elections, putting them in control not just of the government but also of the election of Italy’s next president, due in 2022. Democrats and Five Star both need time to win back voters. They also may want to try tweaking Italy’s election law to make it harder for Salvini to assemble a winning majority.

4. Where does this leave Salvini?

The League -- a rebrand of the formerly secessionist Northern League, once known for deriding residents of the country’s south as beggars, thieves and good-for-nothing rednecks -- still draws more than 30% support in polls, well ahead of any other party. It could clinch a majority in an election if it renews an alliance with other center-right parties. Still, now that the party is in opposition, Salvini’s anti-immigration rhetoric finds much less of an audience. Should Salvini seize power in the next elections, whenever they’re held, investors and the EU might find themselves pinning their hopes on a moderate Salvini ally who was once despised by European partners: former Prime Minister Silvio Berlusconi.

5. What threats does the ruling coalition face?

The new government’s first budget will include only minimal steps to keep its promises, such as tax cuts and green investments. It might take Five Star and the Democrats a few years to deliver on those promises. Salvini, meantime, stands at the ready to highlight the ruling coalition’s failures and build on public resentment for an administration born out of political maneuvering. Regional elections will test the strength of the Five Star-Democrats alliance. So will government policy on migration, in no small part due to Salvini, who made immigration a national obsession. And former premier Matteo Renzi may also complicate matters, having decided to part ways with the Democrats to create his own party.

To contact the reporters on this story: Alessandro Speciale in Rome at aspeciale@bloomberg.net;Marco Bertacche in Milan at mbertacche@bloomberg.net

To contact the editors responsible for this story: Ben Sills at bsills@bloomberg.net, Alessandro Speciale, Laurence Arnold

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