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On Thursday, Italian President Sergio Mattarella gave Giuseppe Conte the opportunity to form a new coalition government, one that would sideline one of Europe’s best-known populists, Matteo Salvini.FILIPPO MONTEFORTE/AFP/Getty Images

At the Group of Seven summit in France, Italy’s Giuseppe Conte was a nonentity – for good reason: just before the meeting, he had resigned as prime minister, his government was finished and Italy was again mired in political and economic chaos.

On Thursday, three days after the close of the summit, Mr. Conte, against all odds, was back in the game. In the morning, Italian President Sergio Mattarella gave the dapper, low-key law professor the opportunity to form a new coalition government, one that would sideline one of Europe’s best-known populists, Matteo Salvini, the Deputy Prime Minister and leader of the Euroskeptic and anti-migrant League party.

Mr. Salvini had gambled and failed – spectacularly so. He had pulled the plug on his party’s partnership with the anti-establishment 5-Star Movement (M5S) in early August on the assumption that the League’s soaring popularity would hand him a majority, or close to it, in an inevitable election.

Apparently, he thought it unlikely that the M5S would try to form a coalition government with its sworn enemy, the old, established, centre-left Democratic Party. But the Democrats and M5S managed to hammer out an alliance Wednesday night. Their intention is to avoid an election, pass a budget that will receive European Union approval and govern until the legislature’s term expires in 2023.

Given their differences – many M5S members consider the Democratic Party corrupt – some of Italy’s political observers have strong doubts that their new government, if it overcomes the final hurdles, can endure.

In an interview, political consultant Francesco Galietti, chief executive of Rome’s Policy Sonar, said it’s premature to say Mr. Salvini and his League party are finished because the new coalition could blow up. Besides the two parties’ philosophical and operating differences, he notes that the power base of both the Democrats and M5S is in central and southern Italy, meaning the wealthy and productive north would be largely unrepresented in the coalition. The power base of the League (formerly the Northern League) is in the north, and Mr. Salvini is from Milan, Italy’s commercial centre.

“The north has no seat at the table,” Mr. Galietti said. “This will be a leftist, southern government that may not last long."

So far, the markets are giving the new coalition the thumbs up. A debt crisis in Italy would pose an existential crisis to the EU and the euro because Italy, in nominal terms, is the continent’s most indebted country, and its no-growth economy is again flirting with recession. The prospect of a potentially stable new government with a broadly pro-Europe stand lifted the prices of Italian sovereign bonds, pushing the yield on benchmark 10-year bonds to less than 1 per cent, an all-time low (prices and yields move in opposite directions).

The low yields will help reduce Italy’s enormous debt funding costs when it sells the next round of bonds.

It appears investors are also betting the new coalition will take a less aggressive stand toward the EU than Mr. Salvini did. The League-M5S government had spent much of its 14 months in power brawling with Brussels over the budget. Mr. Salvini, who completely overshadowed Mr. Conte and M5S leader Luigi Di Maio, was effectively prime minister and lobbied for an expansive budget, including tax cuts, that would have exceeded the budget deficit limits imposed by the EU and raised Italy’s overall debt. It already has a debt-to-GDP ratio of 132 per cent, Europe’s second-highest, after that of Greece.

In a note published Thursday, ING senior economist Paolo Pizzoli said, “Formidable challenges lie ahead, but we expect less hostility towards Europe and a more constructive approach towards the budget.”

Mr. Conte, who is a member of neither the Democrats nor M5S but is endorsed by the latter – he was a compromise prime minister in the last government – said drafting a budget would be his priority. “I will set to work immediately for a budget that will combat the [value-added tax] hike, safeguard savers, give a solid prospect of growth and social development,” he said after receiving his mandate from the President to form a government.

The prime minister designate still has to present an acceptable slate of cabinet ministers to Mr. Mattarella before a new government can be formally launched, assuming it wins a vote of confidence in parliament. The members of M5S have to approve the coalition by voting through the party’s online network, known as Rousseau, that is often used to make crucial policy decisions. Given the animosity of some M5S members toward the Democrats, their approval is not guaranteed, Mr. Galietti said. M5S is still the biggest party in parliament, and the party faithful will want to see a fair division of power in the coalition, he added.

With Mr. Salvini out of the picture, Mr. Conte is expected to act more like a traditional prime minister. In the last government, he was seen as Mr. Salvini’s apologist, defending policies such as stopping migrant-rescue boats from reaching Italian ports, even though it was apparent that some of those policies disturbed him. In his resignation speech on Aug. 20, he launched a scathing attack on Mr. Salvini, calling him “irresponsible” for ending his coalition with M5S in the hopes of triggering an election that would install him as prime minister.

At the G7 summit, Mr. Conte was largely ignored by the other leaders, who assumed he would retreat back to academic obscurity. But he found favour with Donald Trump, who used a tweet to call him “a very talented man who hopefully will remain Prime Minister!”

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