Italy‘s populist coalition government made up of the right-wing Lega party, and the left-wing Five Star Movement, is poised to present its 2019 budget next month, setting out its economic and financial plans for the coming year. It is set to be a key moment for the new coalition.
Ahead of the proposed 2019 budget, Italian lawmakers have called for a “Plan B” to be prepared, meaning an exit from the eurozone for Italy.
Speaking to CNBC, Jim McCaughan, CEO of Principal Global Investors said: ”An Italian exit from the EU and an Italian exit from the euro would be a very, very painful event for the European and therefore world banking system.
“It could require the biggest bank recapitalization ever, bigger than the US in 2008, so there is that tail-risk.
“With public opinion in Italy remaining pro-EU, so long as that stays, I think they are not going to get into that kind of tension.”
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In May, Italy was plunged into a political crisis after President Sergio Mattarella rejected the nomination of anti-euro economist Paolo Savona to become Finance Minister.
Instead, Mr Mattarella instilled a former International Monetary Fund official Carlo Cottarelli as interim prime minister until new elections could be arranged. Since then, the Five Star Movement and the Lega Party have reached an agreement and since formed a new government, led by Giuseppe Conte.
The increasing support of populist parties at the last Italian election triggered the concerns of the EU as both the right-wing Lega and centrist 5 Star Movement (M5S) called for extensive reform of the bloc and called for a referendum on eurozone membership.
At the time, M5S politician Fabio Massimo Cataldo said a future Italian government will shield Britain from any attempt by the EU to take revenge for Brexit.
Mr Castaldo said the UK’s decision to pursue Brexit was also “a matter of respect for democracy”.
He said: “We will try to do our best to bring political pressure (so) that the process will be fair and there will be no attempt for any kind of punishment of the UK. This is an attitude we will not tolerate.”
The EU added fuel to the already fiery relationship with Italy after EU Commissioner Günther Oettinger warned the country financial markets will “teach Italians” how to vote for the “right thing.”
M5S, its coalition partner Lega and the Democratic Party all called for the Eurocrat to resign following his comment.