Italy government alliance clashes with European Union ideology

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

The leaders of Italy's two political upstarts, the Five Star Movement (M5S) and the League, say they have agreed on the final draft of a contract that lays out their vision for a "government of change". Luigi Di Maio, leader of the Five Star Movement, said his party's call for a referendum on Italy's membership of the single currency was a "last resort" to force a relaxation of European Union fiscal rules.

5-Star and the League said in a statement that the draft, which was dated 14 May, was "an old version that has been considerably modified".

The general tenor certainly suggests the new government will not back down from its belief that - in the words of one senior League official, Lorenzo Fontana - "people come before economic obligations".

But some analysts fear that if the radical new government they elected does push ahead with its promised policies, the result could be a Greek-style banking and debt crisis in the eurozone's third-largest economy.

The leaked documents, as well as Salvini's own public statements, make clear that the emerging Italian government is on course for a major standoff with Brussels if the incoming government pushes hard for a to renegotiation of Italy's contribution to the European Union budget as well as the fiscal compact. Five Star would put the pact to an online vote of its members and The League says it will take the deal to the streets.

As the likelihood of a populist government in Italy increases, the yield on Italian government bonds - a measure of investor confidence in the country - has climbed.

Italian stocks .FTMIB tumbled 2.3 percent while Italy's 10-year bond yield jumped almost 19 basis points to 2.13 percent IT10YT=RR .

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In currency markets, the euro rose 0.1 percent to $1.1822, after having set a five-month low of $1.1763 on Wednesday.

"They are preparing excuses if they can not maintain all their promises, so they want to unleash a battle against the European Union", said Andrea Romano, a lawmaker from the centre-left Democratic party. However, three 5-Star sources said the main stumbling point remained who should head the administration.

Emerging market currencies suffered more losses on Wednesday with the dollar's rise, although the Turkish lira pulled back from record lows after the central bank said it would intervene to stop its slide.

Ostwald said he suspected Asian central bank interventions to support their currencies against the dollar would also mean reducing their euro foreign exchange reserves, in order to keep their portfolios balanced.

But this week may go down as the moment when Mr Salvini and Mr Di Maio solidified their alliance on a platform - and tone - of conflict and defiance towards Brussels.

The League has been only a junior partner in governments led by billionaire tycoon Silvio Berlusconi, whose hopes to play kingmaker were dashed when his center-right Forza Italia party finished behind the League in March.

Mr. Berlusconi, 81, the colorful and polarizing four-time prime minister who resigned from his last government in disgrace in 2011, has been an unexpected wild card in the process.

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