Italy's Prime Minister-designate Giuseppe Conte looks on as Italian President Sergio Mattarella signs documents at the Quirinal Palace in Rome on Thursday. Italian Presidential Press via Reuters

Italy’s Five Star Movement and League parties reached a deal with the country’s political establishment to form a government on Thursday night, ending a nearly three-month-long political impasse. The momentum building for the deal assuaged markets’ most pressing fears of snap elections, but the development sets the stage for a populist, Euroskeptic government that will likely continue to unnerve investors.

Under the compromise reached with Italian President Sergio Mattarella, the new ruling coalition’s original pick to be finance minister, Paolo Savona – whose nomination was blocked by Mattarella on Sunday – will be named minister of EU affairs.

Giovanni Tria, a university professor, will take on the finance minister position, where, judging from his academic writing, he will advocate massive public spending.

A recent paper, co-authored by Tria, argued that “a sizeable programme of public investment could be implemented without affecting public debts through a conditional and temporary overt monetary financing.”

The paper suggests that “a fiscal stimulus can and must be designed so as to target both aggregate demand and potential output. Total investment is considered the key-variable in this approach and both private and public investment should be furthered, to the extent that the public capital stock is a driver of growth, directly entering in the firms’ production function or shifting total factor productivity.”

A deal to form a government was reluctantly welcomed by investors, who feared prolonged uncertainty and the prospect of new elections handing the populists an even larger majority. But the unlikely coalition of the left-wing Five Star Movement (who want a massive increase in entitlement spending) and the far-right League (who want tax cuts) was what initially led to a sell-off of Italian assets. The deal to form a government – and the compromise of Giovanni Tria instead of Paolo Savona as finance minister – is unlikely to change the equation.

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