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Angela Merkel floats over the European Union like an angel of mercy. When the EU and the countries within it that use the euro find themselves gravely wounded, she applies the bandages that stem the bleeding. No other European leader – she became German Chancellor 13 years ago – has done so much for so long to keep the patient alive.

But she may be about to lose her magic touch. After a decade of body blows, the EU and the euro zone took another one this week, when Italy, the region’s third largest economy, took big steps toward forming the first populist and openly euroskeptic government in Western Europe.

The Italian President this week confirmed the appointment of Giuseppe Conte as Prime Minister. The little-known lawyer is a compromise candidate who will do the bidding of the coalition between the two anti-establishment parties – Five Star Movement (M5S) and the League – that won the March election. On Friday, Mr. Conte was to put forward the name of the two parties’ top candidate for finance minister. He was Paolo Savona, who calls the euro a “German prison” and whose forthcoming book argues that the launch of the euro almost 20 years ago was a mistake.

To no one’s surprise, Italian bond yields soared in the last week and rose again on Friday, as investors’ Italian holdings shift alarmingly fast into the risky category. Italy is a big country with Europe’s biggest debt load – €2.3-trillion, equivalent to 133 per cent of gross domestic product. What happens in Italy does not stay in Italy and already there are signs of contagion. The 10-year bond yields of Spain, Portugal and Greece have climbed, too, as Italy’s populists storm Parliament.

Poor Ms. Merkel. Her fourth, and presumably last, term as Chancellor was supposed to be a victory lap after the worst effects of the financial crisis and the European recessions finally vanished. Impressive growth had returned to the euro zone countries; even Italy, a perennial laggard, was stumbling back to life. Italy now threatens to trip Europe back into crisis and Ms. Merkel may lack the will and the firepower to mount another rescue operation.

In 2005, when Ms. Merkel became Chancellor, the EU and the euro zone were alive with energy and growth, though the elements of its near destruction a few years later were already bubbling away below the surface, like a volcano ready to erupt. The EU had chosen quick expansion over the deep integration of the core bloc.

In 2004 alone, 10 new states joined, including Poland, Hungary and Slovakia, and it was like inviting strangers to a family-dinner party. The EU became awkward and fractious. At the same time, the introduction of the euro and the European Central Bank (ECB) had allowed fiscally reckless countries such as Greece, Italy and Spain to borrow cheaply with abandon. National debts soared.

The EU’s enlargement and the creation of the euro came well before Ms. Merkel became chancellor, but it was her job to lead the firefighting brigade when the crisis hit. Ailing banks were pumped up with liquidity and Greece, Portugal and Ireland, as well as Spain’s banks, were bailed out. In 2012, the ECB, presumably with Ms. Merkel’s nod, revealed it would buy the sovereign bonds of any country in danger of getting shut out of the debt markets.

Three years later, again no doubt with Ms. Merkel’s approval, the ECB launched its quantitative-easing program, which pushed down bond yields, prevented inflation from turning negative and stimulated growth. Without the ECB’s rescue operations, Italy may well have crashed out of the euro zone.

Not all of Ms. Merkel’s efforts to keep the EU and the euro zone intact worked well. Her enthusiasm for austerity prolonged the recessions in the Mediterranean countries and probably helped to stoke the rise of the populist parties. Germany’s endless current account surpluses meant that some EU countries had to run offsetting current account deficits. Her desire to see the EU’s banks clean up their non-performing loans met with only partial success – Italy’s banks are still struggling. The Brexit vote happened in 2016 even though the EU was well on the road to recovery by then.

Crucially, the EU countries utterly failed to relieve the enormous migrant pressure on Italy. That’s not entirely Germany’s fault – the country was humane enough to take more than one million Syrian refugees between 2015 and 2016. But as the effective leader of the EU, Ms. Merkel could have done more to convince EU countries to resettle some of the 600,000 migrants that came to Italy.

The election of a populist, “Italians first” government in Italy, one that threatens to make a mockery of the EU’s fiscal-discipline rules, would not have come as a total surprise to Ms. Merkel. In Germany’s 2017 election, the euro- and EU-hating Alternative for Germany picked up 13 per cent of the vote. Italians were fed up with decades of economic underperformance. They were losing faith in the EU and the euro and the centrist parties that supported them. The migration crisis virtually guaranteed that the fiercely anti-migrant League would make huge gains in the March election, and it did.

Today, Germany’s newspapers are filled with stories about the new Italian government’s apparently unaffordable, budget-busting policies, including dramatically lower taxes and possibly a guaranteed income; the euroskeptic probable finance minister, Mr. Savona; and the potential launch of the mini-Bot, a government IOU that some Germans are convinced will emerge as a parallel currency, paving the way for Italy’s exit from the euro zone.

The ECB is running out of firepower and will have little incentive to help a country – Italy – that essentially vows to ignore the EU’s debt and budget deficit ceilings. Ms. Merkel could warn the new populist government to behave, for the sake of the health of the EU and the euro one, but that would only taunt its leaders, especially the obstinate League boss Matteo Salvini, into doing the opposite.

Ms. Merkel may come to regret her fourth term as chancellor. Neither the EU nor the euro zone will be stable when a country as large as Italy seems on the verge of a fiscal and political revolution whose outcome is entirely uncertain. Investors in Italian assets have already take an expensive hit. European investors are almost certainly next.

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