MILAN, Nov 28 (Reuters) - In the fraught autumn of 2018, when Italy's populist 5-Star and far-right League government unveiled its first budget, the spread between 10-year BTPs and German Bunds soared by more than 100 basis points, the threat of "Italexit" was on everybody's lips and Rome was the euro zone's problem child.

Fast forward four years and Italy's budget seems to have lost its ability to shock.

After jumping in the immediate aftermath of the September election, Italian government bond yields have been on a declining trend as investors believe recession will force the European Central Bank to slow its monetary tightening cycle.

Since Giorgia Meloni's right-wing executive, with the League as a coalition ally, won the election, the risk premium over Germany has narrowed by about 60 basis points.

Market participants point out that the last four years has seen great change globally, and in Europe in particular.

"The pandemic and the energy crisis have pushed European countries towards more relaxed fiscal policies than in the past. Back in 2018, Italy was one of the few countries with a significant deficit/GDP ratio," said Francesco Maria di Bella, a strategist at UniCredit.

The COVID-19 pandemic has forced the bloc to issue common debt and freeze EU fiscal rules until the end of 2023, an idea that was previously taboo.

The economic backdrop remains ugly for Italy and its partners. As things stand now, sky high energy prices, the war in Ukraine and a record rise in inflation have raised fears of a recession for the euro zone and a sharp slowdown in Italy.

LEARNING LESSONS

While Meloni's government is Italy's most right-wing since World War Two, several analysts say the rhetoric towards Europe is milder than what was heard in 2018 from the awkward pairing of 5-Star and the League.

"Political propaganda before the vote sounded very different four years ago, when markets feared a high risk of an institutional confrontation with Brussels and many ministers had an ambiguous stance as to Italy even belonging to the euro zone," Marco Troiano, Head of Financial Institutions Team at Scope Ratings, told Reuters.

"Meloni does certainly not look too keen on confronting the EU, least of all when it concerns financial matters," he added.

Italy has a powerful incentive not to fall out with the EU: It stands to benefit from almost 200 billion euros in post-pandemic recovery funds.

European politicians have also learned a hard lesson from Britain, where Prime Minister Liz Truss was forced out of office after barely 1-1/2 months following a mini-budget in September that sparked market turmoil.

The extra deficit pencilled in by Rome for next year is aimed at shielding households and businesses from high energy prices and it should "not affect the downward path of debt", as the head of debt Davide Iacovoni said in interview with Reuters earlier this month.

Other analysts say investors are still trying to get the measure of Meloni, the Brothers of Italy leader, and her new administration.

"Markets are still studying the situation and trying to understand. As it is, there is neither a honeymoon nor an upcoming divorce with Italy's new leadership," said Filippo Mormando, strategist at BBVA.

(Editing by Keith Weir, Alex Richardson and Hugh Lawson)