Italy’s populist parties finally reached a deal to form a coalition government on Thursday evening after nearly three months of political deadlock – a prospect likely to shock the EU and shake financial markets.



This is without a doubt the EU's, and France and Germany's, worst possible nightmare come into existence, seeing how this will be the first openly Eurosceptic government in western Europe.



The leader of the northern League, Matteo Salvini, is to be interior minister, while 5-Star head Luigi Di Maio will spearhead a new, beefed up ministry combining the industry and labor portfolios, while the little known Giuseppe Conte will become the new prime minister.



After days of intensive negotiations, the anti-immigrant, hard-Right League party and the anti-establishment Five Star Movement ironed out their differences.



The prospect of Western Europe’s first populist, Eurosceptic government will unnerve Brussels and could lead to further turmoil on financial markets, not just in Europe but around the world.



Both parties are deeply Eurosceptic and have flirted with the idea of ditching the euro as Italy’s currency, although in the 24 hours before the breakthrough they had been at pains to deny that that was one of their objectives.



Luigi Di Maio and Matteo Salvini.





Five Star and the League had come close to forming a government at the weekend, only for their efforts to be torpedoed by Italy’s president, Sergio Mattarella, who refused to approve their choice of economy minister and instead wanted to appoint Carlo Cottarelli as prime minister, an ex IMF pro EU technocrat which no one voted for.



However the Italian parliament looked set to block the appointment of Carlo Cottarelli and his government, leaving little choice to the Italian president between announcing fresh elections or a compromise with the Populist parties.



And a compormise did happen when both parties reached a new deal and will now form a new goverment. The key breakthrough for the deal came when the parties dropped their insistence that Mr Savona be made economy minister.



The economy portfolio could go to Giovanni Tria, a little-known economics professor. Professor Tria has been critical of the EU's economic governance, but unlike Mr Savona he has not advocated a plan to prepare for Italy’s possible exit from the currency bloc.





Giuseppe Conte, the new Italian prime minister.





Giuseppe Conte, the designated prime minister for the new populist governing alliance, presented a list of ministers to president Mattarella at the Quirinal Palace in Thursday night, which the Italian president accepted, paving the way for the new government to be sworn in on Friday afternoon.



“An accord has been reached for a Five Star-League government with Giuseppe Conte as prime minister,” the parties said in a joint note on Thursday night.



The new government is likely to clash frequently with the EU, having already struck a deeply adversarial tone with Brussels apparatchiks, and will most likely derail any plans for further EU integration, as was proposed by the French President Macron and warmly supported by Germany's leader Angela Merkel.