More than two months of political deadlock looked to be nearing a close with the unveiling of the plan by the anti-establishment Five Star Movement and the far-right League party.

The manifesto contains a cocktail of measures with a neo-Keynesian flavour designed to stimulate consumer spending and kickstart growth, including drastic tax cuts, a universal basic income and financial help for families — with the aim of reducing the country's gigantic debt mountain of 2.3 trillion euros ($2.7 trillion).

“At face value, the coalition agreement between La Lega and the Five Star Movement threatens to reignite the euro crisis and raises concerns about the sustainability of Italy's debt position,” warned analysts at Oxford Economics.

READ MORE: Here are the key proposals from the M5S-League government programme
Photo: Tiziana Fabi/AFP

'Irresponsible', 'harmful'

The plan poses “no direct threat to Italy's euro membership”, said Holger Schmieding, an analyst with the Berenberg bank, but it still “includes a list of fiscally irresponsible and economically harmful measures”.

Schmieding said there was every chance that the long list of measures would be “watered down” under pressure from the Italian president, the country's top court and its EU partners. “Although we have to brace ourselves for significant noise, including clashes between Rome and Brussels, a truly disruptive crisis is probably not on the cards for now,” he said.

The parties' supporters say some of the extra costs generated by free-wheeling spending plans could be financed by measures against tax fraud and the waste of public funds. But experts say the strategy still amounts to a monumental gamble, and could well knock off course the trajectory of Italy's annual deficit, which was 2.3 percent of GDP in 2017 and is projected to fall to 1.7 percent this year.

The Oxford Economics Institute puts the combined cost of the key measures — citizens income, tax cuts and lowering the retirement age — at 100 billion euros per year.'

“The planned increases in expenditure and tax cuts are likely to drive Italy's national debt, which is already very high, even further up,” said analysts at Commerzbank.

The two parties have meanwhile vowed that any move to widen the deficit would be “appropriate and limited”.

Instead of inflating the deficit, M5S leader Luigi Di Maio told journalists, the allies would ask the European Union for a rebate of part of the 20 billion euros that Italy pays into the EU budget every year.

Change the rules

The Italian projects have, predictably, raised red flags in Brussels, with EU Commission Vice President Jyrki Ktainen urging Rome to respect the EU stability and growth pact which Italy would be violating if its deficit should rise back above 3.0 percent of GDP.

EU Commissioner Valdis Dombrovskis said that Italy's debt-to-GDP ratio, the eurozone's second-worst after Greece, needed to be put on a downward trajectory. But the League and M5S appear to be hoping that they can get off the hook by getting the Commission to change the rules that currently apply to deficit calculations.

Concretely, they suggest separating “productive investment” from “current deficits” in the name of “consolidating growth”, instead of lumping them together. More generally, the two parties said they want to revise the entire “framework of economic governance” which they believe is too much based on the “dominance of markets”.

That means there is still plenty of scope for conflict even after the parties dropped radical moves contained in earlier drafts which, besides exiting the euro, also included a demand that the European Central Bank cancel 250 billion euros of Italian debt.

Their current wishlist also includes a vague call for international central bank cooperation, more power for the European Parliament and measures against price dumping within the EU.

By Celine Cornu