Five-Star Movement (M5S) leader Luigi Di Maio walks in downtown Rome after a meeting with the leader of the League Matteo Salvini Thursday, May 10, 2018. League leader Matteo Salvini, who heads the center-right bloc, and 5-Star leader Luigi di Maio said in a joint statement after a face-to-face meeting in Rome that they had reached ‘’significant progress’’ on the composition of the Cabinet and on identifying a candidate for the post of premier. (Giuseppe Lami/ANSA via AP)

MILAN - The populist leaders of the 5-Star Movement and the League announced progress Thursday toward forming a new Italian government after two months of political stalemate.

The breakthrough came days after Italy's president, Sergio Mattarella, indicated that, given the rounds of fruitless consultations, he would form a "neutral government" — something both parties are determined to avoid. Neither won enough to govern alone in the inconclusive March 4 elections that created a hung parliament, but they have been stymied in reaching a coalition deal largely over the role of former Premier Silvio Berlusconi in any government.

League leader Matteo Salvini, who heads a centre-right bloc, and 5-Star leader Luigi Di Maio said in a joint statement after a face-to-face meeting in Rome that they had made "significant progress" on the composition of the Cabinet and on identifying a candidate for the post of premier to bring to Mattarella. The timing of such a meeting remains unclear, but Italian media reported that the parties had asked to have through the weekend to work on a deal.

The parties' lawmakers will begin work later Thursday on a government contract that will define the legislative priorities of the new government, following the tradition of a formal, signed coalition agreement in Germany.

The progress also reflected a shift in Berlusconi's role in a new government. Di Maio had steadfastly refused any government including Berlusconi, who is ineligible for public office due to a tax fraud conviction and has a long history of legal battles over his business and private life, while Salvini refused to break up the centre-right coalition that includes Berlusconi's party.

Berlusconi on Wednesday, however, said he would not veto any decision by Salvini to form a government with the 5-Star Movement, even if his Forza Italia will not support it in a vote of confidence in the parliament. Berlusconi said that his party would support any measures taken by the new government that are in line with the centre-right program "and that we consider useful for Italians."

Wolfango Piccoli, the co-founder of Teneo Intelligence consultancy, said he expected any 5-Star-League government to be short-lived, with new elections likely to take place in the spring of 2019.

"The lack of familiarity (with each other) and government experience, together with the likely limited life-span of the coalition government, will somewhat constrain the capacity of the new executive to follow through on their more outlandish campaign pledges," Piccoli said. Those include Salvini's flat tax and Di Maio's pledge to offer a basic income to citizens without income or whose income is too low.

Financial markets have taken the stalemate mostly in stride, with the first small signals of discontent coming only this week with the Milan Stock Market underperforming its European peers and the spread on Italian government bonds widening slightly.

Analysts say that the market reaction to any Salvini-Di Maio government is likely to be negative, depending on what kind of pact they come up with.

"If Berlusconi is merely out, an anti-establishment, anti-euro (although somewhat watered down) and anti-austerity government would not bode well for the BTP-Bund yield spread and Italian financial assets," said Lorenzo Codogno, a former Treasury official and independent political analyst.

News from © The Associated Press, 2018