Italy keeps Europe on tenterhooks over reform

Reuters News
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Posted: Oct 26, 2011 4:10 AM
Italy keeps Europe on tenterhooks over reform

By Philip Pullella

ROME (Reuters) - Italian Prime Minister Silvio Berlusconi goes to the European Union on Wednesday with an offer of economic reforms after bickering coalition parties hammered out a last-minute deal.

Berlusconi is bringing with him a "letter of intent" outlining Italy's plan for reforms demanded by its EU partners as a condition for buying its bonds, though questions loom over whether they will be enough to restore market confidence.

The euro zone's number three economy is at the center of the debt crisis as investors fret about its sluggish growth and political instability. It needs to issue some 600 billion euros in bonds in the next three years to refinance maturing debt.

Umberto Bossi, leader of the Northern League, whose support is vital to Berlusconi, said the coalition had reached agreement on reforms but that it was up to the EU to decide if they were enough. "In the end we have found a way. Now we will see what the EU says," Bossi told reporters late on Tuesday.

A key sticking point between the allies -- the retirement age for women -- was resolved after Bossi removed his opposition to raising it to 67 from 65 years.

But Bossi said he was still pessimistic about the survival of the coalition government and that his party would not budge on other provisions that allow for early retirement. He had earlier said the disagreement on pensions could bring down the government and force early elections.

EU nations say the retirement age must rise in Italy, which has a public debt of 1.8 trillion euros, equal to 120 percent of GDP.

The opposition said Berlusconi was bringing about "the Italian disaster" and repeated calls for him to step down.

GROWING PRESSURE

Newspapers have been awash with speculation in recent weeks that Berlusconi -- distracted by sex scandals and legal troubles -- will not survive much longer as the pressure from coalition allies and European partners mounts.

The La Repubblica and La Stampa dailies in unsourced reports on Wednesday said the premier had struck a secret deal with Bossi on early elections in March in return for the League's backing on pension reform.

EU leaders, particularly German Chancellor Angela Merkel and French President Nicolas Sarkozy, have demanded that Italy present firm plans to promote economic growth and reduce Rome's massive debt.

The possibility that Italy could lose control over its debt pile and put the entire euro zone at risk has spooked financial markets. The three main credit ratings agencies have all downgraded Italy.

Italy relies on intervention by the European Central Bank to keep its borrowing costs at manageable levels. It has passed a series of reforms, but has failed to convince markets worried that the divisions in the government will stymie painful measures aimed at cutting the debt and boosting the stagnant economy.

Economy Minister Giulio Tremonti has promised a package of reforms that would open up closed professions, cut red tape and raise revenue through steps such as privatizations and a new wealth tax, but the measures have been repeatedly delayed.

Berlusconi has reacted angrily to pressure from Germany and France to enact reforms. He issued a statement on Monday declaring that no EU country was in a position to give lessons to its partners.

(editing by David Stamp)