Italy's President Allows 5-Star's Conte to Form New Gov't With PD

Italy's President asked Giuseppe Conte to head up a coalition of the 5-Star Movement and opposition Democratic Party (PD) Thursday, a move could that could improve Italy's fractious relations with the European Union.

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Markets welcomed the prospect of a quick end to a three-week-long political crisis triggered by League leader Matteo Salvini, who pulled his far-right party out of its governing alliance with 5-Star after weeks of public bickering.

Conte said he would change market policy from the policies of the far-right League party. 

"It will be a government for the good of the citizens, to modernize the country, to make our nation even more competitive internationally, but also more just, more supportive and more inclusive,” he said. 

Salvini had wanted fresh polls to capitalize on his party's success in the European elections, but his plan backfired as 5-Star and the PD, lagging the League in opinion surveys, set aside their long-standing antipathy to form a government.

Italy's ten-year borrowing costs fell to an all-time low at auction Thursday on the news as the prospect of a snap election retreated.

Conte, who told reporters he would present a cabinet list to the president in the coming days, said his priority was to draft a 2020 budget.

"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 creation of a new government is not yet a done deal, however, and the two parties still need to agree on a shared policy platform and divide up cabinet posts.

In a further complication, 5-Star has promised to put the deal with the PD to an online vote of its members. Many 5-Star supporters oppose a pact with the center-left and a 'yes' vote is not a certainty.

The PD leader Nicola Zingaretti said the priority for the new coalition would be to revive the stagnant economy.

"As soon as it takes office, the government will have to act very quickly to relaunch the country -- school, environment, infrastructure, investment to create work," he said in a statement.

"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," UBS Wealth Management Italy's Matteo Ramenghi said.

German Finance Minister Olaf Scholz said Conte's appointment was good news for Europe, adding, "I'm glad to see that the government crisis in Italy seems to have come to an end now and that a stable and new, progressive government can take the helm."