Italy economist Sapelli will not be candidate for PM: 5-Star source

Italy's populist government is still a work in progress

Brussels calls on Italy to stay committed to the 'European path'

At present, EU treaties don't provide a procedure for a member state to leave the euro, without leaving the Union as well. Lega in particular wishes to radically cut taxes, including VAT and excise duties, but European Union commissioner Valdis Dombrovskis spoke out Tuesday morning to tell Italy they must conform with European Union demands.

"We will see and we will work with the government and the president [Sergio Mattarella]", a source in Paris said, pointing out that "Mattarella said that "Europe is his absolute priority" and that "M5S "Europeanised" its positions during the campaign".

The two pre-election adversaries began negotiating a coalition deal last week, more than two months after an inconclusive March 4 election produced a hung parliament.

The opposition Democrats, who controlled the outgoing government, warn that the League's vow to drastically lower taxes to a flat 15-percent rate, and the 5-Star's promise to give government subsidies to low-income Italians will spook financial markets and drastically drive up government borrowing costs.

The draft accord is likely to cause concern in Brussels and at European Central Bank headquarters in Frankfurt.

Earlier in May, Italian President Sergio Mattarella raised the specter of new elections (http://www.marketwatch.com/story/italy-faces-new-national-elections-this-summer-2018-05-08) after a last-ditch effort to persuade the political groups to bridge their differences failed.

The shock manifesto, entitled Government for Change, reveals plans for Italy to leave the single currency, calls for sanctions against Russian Federation to be scrapped and reveals plans to ask the European Central Bank to write off the country's £250bn debt.

This would cut 10 percentage points off Italy's debt/GDP ratio.

Both parties have a history of Euroscepticism. The League plans to hold an informal referendum in city squares across Italy this weekend on any eventual deal, which anyone can vote in, while 5-Star plans an online ballot for its members.

It is still far from clear whether Five Star and the League are prepared to go all the way - and in fact the bluster on the euro may simply be the product of a political compromise in their negotiations that will never translate into policy.

The League, which is in coalition talks with the anti-establishment Five Star Movement, has called for a harder line on migrants and wants to take Italy, the third largest economy in the eurozone, out of the single currency.

They also demand an immediate end to sanctions on Russian Federation in order for Moscow to become a "strategic partner" in regional hotspots, such as Syria and Libya.

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