Italy became the latest target in Europe’s financial crisis today, as soaring borrowing rates intensified pressure on premier Silvio Berlusconi to resign.
But he dismissed reports that he was considering stepping down in favour of early elections, saying they were “without foundation”.
However the prospect of financial disaster was real because of Italy’s huge debts and slow growth.
Unlike Greece, Ireland and Portugal – the three countries that Europe has already bailed out – Italy’s economy could be too large to rescue.
Investors want the government to quickly pass measures to boost growth and cut debt. But defections from Mr Berlusconi’s coalition government mean he no longer commands enough loyalty to pass the reforms.
Increasingly, Mr Berlusconi is himself being seen as the problem.
If he should resign or lose a confidence vote, President Giorgio Napolitano would decide whether to call early elections, or name a government of technocrats rather than politicians. The most widely discussed name to lead a technical government is Mario Monti, a former EU competition commissioner.
The opposition centre-left has long demanded the resignation of Mr Berlusconi, citing sex scandals, criminal prosecutions and legislative priorities it says are aimed at protecting his own business interests rather than those of the country. However, it has failed to come up with a leader who can energise the base and create a credible program, leaving the opposition divided and rudderless.
The ultimate fear is that Italy cannot pay for its £1.6 trillion debt and need international help. Europe would struggle with a bailout that large, meaning a default that could break up the 17-nation eurozone and drag down the global economy.
The yield on Italy’s 10-year bonds jumped to 6.67%, its highest level since the euro was established in 1999 and uncomfortably near the 7% threshold that forced both Ireland and Portugal to accept bailouts. As yields rise, governments must devote more of the national budget simply to paying interest costs, creating a vicious circle of debt.
Mr Berlusconi had lunch with his children and friends at his villa near Milan, sparking Italian media to speculate he was devising an exit strategy. But the lunch is a family tradition and his Facebook page said “the reports of my resignation are without foundation.”
Public administration minister Renato Brunetta, a Mr Berlusconi loyalist, acknowledged that the government has a “numbers problem” in parliament and if a majority is lacking then “everybody goes home.” Interior Minister Roberto Maroni agreed, adding “it is useless to persist.”
But Mr Berlusconi has remained defiant, insisting he still commands enough support in Parliament.
“I don’t understand how rumours of my resignation are circulating,” he said.
Opposition leader Pierluigi Bersani said MPs are planning a confidence vote which analysts say could come as early as Tuesday.
Mr Berlusconi has pledged to call one himself to prove his majority stands, possibly next week, on reforms and other stopgap measures to lower Italy’s debt.
The reform measures include a plan to sell government assets and tax breaks to reduce youth unemployment of 29% and to get women back into the work force in a country where just 48% of women have jobs. The legislation would also allow shops to stay open on Sundays and open up closed professions.
Mr Berlusconi has also pledged to raise the retirement age to 67 for all to match European trends, despite the fierce resistance of his allies in the Northern League, on whom Mr Berlusconi relies to govern.
The leader of Italy’s largest labour confederation, meanwhile, predicted 2012 will be a “terrifying” year for the economy even if Mr Berlusconi leaves power. CGIL leader Susanna Camusso also slammed Mr Berlusconi’s anti-crisis plan as containing virtually nothing to spark economic growth.