Italian government on the brink as EU plan stalls

AP News
Posted: Oct 25, 2011 3:59 PM
Italian government on the brink as EU plan stalls

The Italian government and a broad European plan to save the euro were both at risk on Tuesday, with Premier Silvio Berlusconi locked in a high-stakes battle with coalition partners to muster support for emergency growth measures demanded by the European Union.

Markets are looking to the EU's grand plan _ promised in time for an EU summit on Wednesday _ for a turnaround in the debt crisis that will avert a potential global recession.

But the plan risked being delayed, yet again, as governments failed to agree on details. Berlusconi's government, meanwhile, showed little sign of meeting the EU's demands for reforms, a prerequisite for the grand plan to go ahead.

The summit of EU leaders, meant to be a confidence-building day, risked going down as another failure in Europe's fight to stem its 2-year-long debt crisis.

EU officials say they will not present their comprehensive plan if Italy doesn't agree to new economic measures they demanded Sunday. But Berlusconi has been unable to get his key ally in parliament, the Northern League, to swallow an increase in the pension age. The Northern League says it will alienate its constituency of workers in the productive north.

Northern League leader Umberto Bossi conceded the government is at risk.

"Let's say the situation is difficult, very dangerous," he told reporters in Rome.

The head of Berlusconi's People of Freedom Party, Angelino Alfano, suggested Berlusconi's party had reached a deal with the Northern League _ but no details were announced and the premier's office remained silent.

"We hope to have identified a point of balance with the League that allows us to give a response to the European Union also on pensions," Alfano said during the taping of an evening talk show, the news agency ANSA reported.

Berlusconi has survived scandals, court cases and dozens of confidence votes, but experts say the economic plan he needs to get approved will be one of the most critical tests yet of his grasp on the country's leadership.

"Berlusconi has an immovable object at home which is Bossi and the Northern League, and an unstoppable force abroad which is the European Union, so he's in a very, very difficult position," said James Walston, a political science professor at American University in Rome.

A Cabinet meeting to draft the emergency growth measures ended Monday evening in silence _ a clear indication of discord within the government majority.

The EU wants Italy to raise its standard pension age from 65 to 67, change the legal system to encourage investment, and pass other reforms to improve growth. All are measures that have been talked about for years in successive governments, but there has been little political will to see through the unpopular decisions.

Bossi has said the Northern League will not support any increase in the pension age.

But it's a move that partners such as Germany view as critical. Germany is raising its pension age to 67 for anyone born after 1964 and Chancellor Angela Merkel will have a hard time explaining to voters at home why Europe's largest economy should be ready to help countries whose workers retire earlier.

A policy impasse this time could cost Berlusconi his power.

The failure of his majority in parliament to pass a routine measure earlier this month shows just how tenuous his hold on power has become. Berlusconi survived with a vote of confidence, but the impression remained that his government is weaker than ever _ and could fall on any test.

Ratings agencies have cited the government's inaction and failure to draft growth measures as reasons for downgrading Italy's growing debt, now euro1.9 trillion ($2.64 trillion), or nearly 120 percent of GDP and the second highest in the eurozone after Greece.

Despite the ratings agencies' lack of faith in Berlusconi, analysts in Italy caution that his ouster could bring months of political deadlock until a new parliament is elected. It would be up to Italian President Giorgio Napolitano to decide to retain Berlusconi in power pending new elections, or install a technical government, which also would require the cooperation of parliament.

"I believe at this moment, a government crisis would be a disaster, because in the next months we have a huge quantity of debt that needs to be refinanced. A government crisis would destroy the market trust," said Francesco Giavazzi, an economist at Milan's Bocconi University.

The outgoing governor of Italy's central bank, Mario Draghi, has already expressed concern that rising borrowing costs are threatening to eat up a chunk of the euro54 billion in austerity measures approved by parliament last month. For weeks, the ECB has been buying up billions in Italian bonds, trying to keep Italy's borrowing costs down.

Italy's fate is crucial to the eurozone because it is the bloc's third-largest economy and would be too expensive to rescue.

To avoid that scenario, the EU is working on a three-part plan _ writing off more of Greece's debt, raising ailing European banks' capital levels so they can deal with those losses on Greek bonds, and boosting the bailout fund's powers.

All three measures need to be agreed together in order to work, but it appeared that agreeing on the Greek writedowns and the bailout fund would take longer than expected.

The 10 EU countries that do not use they euro won't sign off on the move to force banks to raise new capital without the other two parts of the plan in place. They insisted to call off a meeting of finance ministers Wednesday, which was to iron out the technical details of the plan ahead of the leaders' summit later in the day, according to European officials said. The spoke on condition of anonymity because the talks were confidential.

Without the finance ministers' meeting, it is likely that the summit's conclusions will remain vague.

The negotiations over easing Greece's debt load center on talks with banks and other private investors to take losses of as much as 60 percent on their Greek bond holdings. Negotiators for the banks, however, have indicated that they will not accept losses of that magnitude.

Forcing losses onto banks could trigger big payouts of credit insurance and cause huge turbulence in global markets, analysts warn.

At the same time, two schemes to give the euro440 billion ($612 billion) European Financial Stability Facility more firepower _ by using it to guarantee bond issues from shaky countries like Italy and Spain and attract private sector capital _ also still lack detail and broad agreement.


Gabriele Steinhauser in Brussels and Eugenio Montesano in Rome contributed to this report.

(This version CORRECTS Corrects Angelino Alfano's title. This story is part of AP's general news and financial services.)