Italy has moved—again—in the direction of stability in the short term, while facing long-term fragility of its economic and financial situation.
The European Commission exposes Italy’s wishful thinking.
It may take a further rise in Italian bond yields to remind the populist government’s leaders in Rome that their room for maneuver to operate with more debt is very limited.
If Italy’s government tames its radical instincts it could be allowed to get away with a few things. But if it is confrontational with the EU it will be heading for trouble.
Populists in power, like Five Stars and the Lega in Italy, can do serious damage. In the case of Italy, the key risks are long-term rather than immediate.
To advance their prospects of finding partners, both 5Star and Lega have ditched the most dangerous part of their erstwhile agenda. But significant risks remain.