"We Must Act": Italian PM Conte Pledges Swift Action After Getting Green Light To Form New Government

Nine days after he resigned from Italy's government, Giuseppe Conte has returned as prime minister to form a new government that will exclude Matteo Salvini, the former right-wing hardliner who was once widely believed to be next in line to occupy the Quirinale Palace, the seat of the Italian government.

On Thursday, Conte said he would accept the role with reservations, saying that he would immediately start working with all other Parliamentary Groups, and added that Italy must open itself up and become "a country which is open to everyone," CNN reports. His first task, as he informed Italian President Sergio Mattarella, will be finding candidates to form a new cabinet. Conte officially informed Mattarella that he would accept his nomination as PM, putting an end to a three-week long political battle that threatened to blossom into a full-blown political crisis.

"This is a moment for courage and determination - a determination which will not be dogged by obstacles," he said.

After holding together for more than a year, much longer than most political observers had anticipated, the coalition between M5S and the League Party fell apart last week after months of infighting over key policies.

Even more surprisingly, the Five Star Movement and the Democratic Party, decided to form a coalition after more than a week of tense negotiations. One of the main sticking points for both parties was that Conte, a technocrat, return to reprise his role as prime minister.


As the FT explained, the decision to re-anoint Conte as prime minister is a sign of just how much influence the moderate politician, who previously led a coalition of anti-establishment lawmakers, has gained. Conte has "marched decisively out of his deputies' (that is, Salvini's) shadow" and now boasts an approval rating of just below 60% - something most mainstream politicians would kill for.

He even won the endorsement of President Trump during last weekend's G-7 meeting.

But after humiliating Mr Salvini in a blistering speech to the Senate, Mr Conte seems to have marched decisively out of his deputies’ shadow. He was embraced by Angela Merkel, German chancellor, at the G7 last weekend and even got the seal of approval from Donald Trump, the US president, who on Tuesday tweeted his esteem for the "highly respected" Mr Conte who "loves his country greatly & works well with the USA. A very talented man who will hopefully remain Prime Minister!"

Mindful of Mr Conte’s approval ratings, which have reached as high as 58 per cent - a level most leaders can only dream of - Five Star has insisted he remain prime minister in any new coalition. The Democratic party (PD) has however said it wants a clear break with the previous government.

As Reuters pointed out, Conte's reputation as a pragmatic technocrat could improve Italy's relationship with the European Union, which could come in handy during the upcoming budget negotiations this fall.

Conte's top priority is formulating a budget that will allow his government to avoid implementing a VAT hike on Jan. 1 that could do more damage to Italy's already-struggling economy. 

"We must immediately get to work and draw up a budget to avert the VAT hike, protects savers and offers solid prospects for economic growth and social development," he said.

The VAT rate will rise unless Italy manages to find $26 billion of government funding from another source.

Hoping to seize on his rise in popularity, Salvini withdrew his support for the government and pushed for a no-confidence vote on Conte, hoping to collapse the government and force a new round of elections that could see his far-right League Party return as the leader of a new conservative coalition. But Salvini's plan backfired, as his the new coalition will see the League relegated to the opposition.

Italy's former government challenged Brussels over its budget deficit, its unwillingness to take in more migrants and its openness toward making amends with Russia.

But according to local media reports, Conte is preparing a policy platform that would ask Brussels for more "flexibility" in crafting a budget, adopting a much more conciliatory tone.

Italian stock markets and bond markets rallied after Conte's decision, as analysts warmed to the new coalition.

"We think it will be less challenging to agree on an agenda between M5S (5-Star) and PD because the priorities both political forces have set out seem broadly consistent in many areas, ranging from fiscal policy to Italy’s relationship with the EU to a focus on a green economy," said UBS Wealth Management's Matteo Ramenghi.

Meanwhile, former Democratic Party PM Matteo Renzi said he would not be joining the new Italian government in a ministerial post, though he supported the coalitions efforts to make a deal because it would stop Salvini.

Still, Renzi celebrated the new coalition, as he told reporters.

"This result: politics 1, populism O. This is the result of the first half of the match," he told CNBC’s Joumanna Bercetche, implying that he expected Salvini to return with some sort of challenge.

He has good reason to believe that to be the case. As we noted yesterday, frustrated members of the League urged their supporters to take to the streets to protest the new governing coalition, which they branded as undemocratic usurpers.

Here's a chart illustrating the new government vs. the prior government.

Though while it appears Italy has avoided another election for now, Conte has several serious challenges facing him, not the least of which involves crafting Italy's 2020 budget, and selling it to Brussels. That creates the possibility of market-rattling political turmoil ahead.