Italy making progress toward coalition government

The two parties seeking to form a new Italian government made progress toward a coalition deal on Wednesday, after agreeing that Giuseppe Conte should stay on as prime minister.

Conte quit as prime minister on Aug 20, after Matteo Salvini pulled his right-wing League party's support from the populist coalition that has been governing the country with the anti-establishment 5-Star Movement since June 2018.

League chief Salvini had declared his 14-month coalition with 5-Star dead, seeking to trigger elections and capitalize on his surging popularity.

Since the collapse, 5-Star has been scrambling to mend ideological differences and coexist in a viable coalition with the opposition Democratic Party, which, until Tuesday, had been resisting the reappointment of Conte, who belongs to no party but is close to 5-Star. Such a coalition would push Salvini's League into opposition.

Negotiations looked set to continue until Wednesday afternoon when both parties were due to report on their progress to President Sergio Mattarella.

If not convinced that a new coalition can command a dependable majority in Parliament, Mattarella will name a caretaker government and set elections for later this year, when Salvini's nationalists would eye victory.

On his return to Italy from the G7 summit in France, Conte, who remains as caretaker leader while talks to form the new government continue, received the endorsement of US President Donald Trump on Twitter. Trump said he hoped Conte "will remain as prime minister" was "highly respected" and "represented Italy powerfully at the G7".

Reuters reported that a Democratic Party source said the talks were still at risk of failure over the post of deputy prime minister, saying 5-Star leader Luigi Di Maio was insisting on retaining that role in a new coalition despite strong opposition to this from the Democrats.

Even if a deal were struck, it would need to survive an online vote of 5-Star party members, the party said in a blog post. Many of its members are hostile to the Democratic Party and have used social media to urge Di Maio against doing a deal.

The two parties have different policies for Italy's 2020 budget, which must comply with European Union deficit rules. Italy is the third-biggest economy in the eurozone but, at 132 percent, it has the second-biggest debt in proportion to its output. Another significant policy difference is 5-Star's key demand of a cut of 345 parliamentarians.

Investors, though, are betting that Italy will avoid snap elections, fearing they would be won by Salvini's hard-right League, which would put Rome on a collision course with the EU over increased government spending.