Do not assume that Italy’s insurgent coalition will capitulate to EU demands if risk spreads on Italian debt blow through the fatal line of 400 basis points.

The European Commission’s strategy of ‘controlled escalation’ relies on tacit collusion with bond vigilantes and hedge funds to ratchet up the pressure. The method is to squeeze the capital buffers of Italian banks and ultimately to set off a deposit run, hoping that such financial vandalism does not set off contagion to Portugal, Spain, and Greece.

This is a dangerous game to play unless you can be sure that the Lega-Five Star alliance will back down rather than resort to radical measures in self-defence. The obvious risk is that Italy’s budget fight with Brussels will cause a pan-European financial crisis before either side blinks.

“Brussels can keep sending its silly letters until Christmas. Our budget is not going to change. The gentlemen speculators will just have to get used to it, because we will not retreat,” said Lega strongman, Matteo Salvini, relishing a political knife-fight with the EU all the way to the European elections next May.

“If the EU insists on dishing out these slaps in the face, I might be tempted to give even more money to the Italian people,” he said.