Italy anti-system parties to up spending

Steve Scherer and Gavin Jones

Italy's two anti-establishment parties have vowed to ramp up spending in a program for a new coalition government, putting them on a collision course with the European Union despite watering down some of their most radical proposals.

The "contract" by the League and the 5-Star Movement, the two parties that won the most parliamentary seats in inconclusive elections on March 4, has still to be approved by their memberships in informal votes to be concluded by Sunday.

League leader Matteo Salvini said he and 5-Star chief Luigi Di Maio would meet President Sergio Mattarella on Monday.

Mattarella must give his blessing to the program and their prime minister candidate, who has yet to be named, before a government can be formed.

The document, published after 11 weeks of political stalemate in the euro zone's third-largest economy, calls for billions of euros in tax cuts, additional spending on welfare for the poor, and a roll-back of pension reforms.

The euro sank on the latest developments on Friday and was headed for its fifth straight weekly fall against the dollar, in what would be a first for the currency since 2015.

"The possibility of a eurosceptic government in Rome is shaking investor confidence... at this point a larger fiscal deficit and greater bond issuance [in Italy] does seem likely," said David Madden, a strategist at CMC Markets.

The euro gave up gains and fell 0.2 per cent to $US1.1778 after the Italian parties outlined their economic plans. It settled near a five-month low reached on Wednesday of $US1.1763.

The final accord dropped a proposal that would have posed the most direct challenge to EU fiscal rules, and sought to assure rattled investors that the government blueprint did not include any plans for an exit from the euro single currency.

An earlier draft, reviewed by Reuters, had called for the EU to create fiscal headroom for Italy by adjusting the formula used to calculate its debt burden. The final version omitted that proposal but still called for a review of EU governance and fiscal rules -- setting the stage for the bloc's biggest political challenge since Britain voted to leave two years ago.

Italian government bonds lost more ground on Friday, with 10-year yields hitting a seven-month high. Investors are worried that a G7 nation, with a debt burden second only to Greece in the EU, is about to embark on a huge spending spree.

Italian shares also lost 1 per cent.