Italy’s coalition government in fight for life

Italy’s prime minister was fighting on Tuesday night to stave off a collapse of his centre-right coalition government over European Union demands for more concrete economic reform measures in time for Wednesday’s highly anticipated summit of eurozone leaders.

The demand came as European officials attempted to reach a final agreement on giving the eurozone’s €440bn rescue fund more firepower so that it can assist Italy by purchasing Italian bonds, lowering Rome’s borrowing rates, which are near 6 per cent.

While such EU assistance falls well short of a full-scale Italian bail-out, senior European officials said it would come with tough new conditions, and that the demands on Silvio Berlusconi were the beginning of a more intrusive effort by Italy’s eurozone partners to ensure Rome convinces the financial markets it is sincere about fiscal reforms.

Talks early on Tuesday between Mr Berlusconi and his Northern League coalition partners failed to resolve the deadlock – centred on proposed pension reforms – after inconclusive negotiations the night before.

“The government is at risk,” Umberto Bossi, leader of the fiercely eurosceptic and federalist Northern League, told reporters in Rome. “The situation is difficult, very dangerous. This is a dramatic moment,” he said, warning of possible snap elections.

But Angelino Alfano, secretary of Mr Berlusconi’s People of Liberty party, said on Tuesday night that an agreement on reform measures had been reached with the Northern League that would hold the coalition together and assure economic growth. Details were not immedietaly available.

Talks between the coalition parties continued into the night, indicating no substantial agreement on reforms had been reached.

Mr Bossi said later he was pessimistic and dug in his heels over pension changes. “If we touch pensions the people will kill us,” he told reporters.

Any Italian compromise that promises future action could be hard to swallow for eurozone leaders seeking a comprehensive solution to the sovereign debt crisis at the Brussels summit, their second in four days. The European Central Bank, which has been propping up Italian debt on the markets since early August, received similar commitments in the past.

Mr Berlusconi’s difficulties mirrored tough pre-summit negotiations in other European capitals, where leaders were struggling to finalise the overhaul of the rescue fund and strike a deal with Greek bondholders that would allow them to lower the amount of government bail-out aid to Athens.

Officials warned that the Greek talks were still unresolved, raising the possibility that a second Greek bail-out would not be fully complete by Wednesday evening. In addition, a draft of reforms to the rescue fund, the European Financial Stability Facility, obtained by the Financial Times, warned that “a more precise number on the extent of” its new firepower is unlikely to be finalised in time for the summit.

Without finalising the EFSF and the deal on Greek bondholder losses, it will be difficult to close a deal on the third pillar of the deal , a recapitalisation scheme for Europe’s banks, since it is highly dependent on the other two pillars.

A fudged Italian proposal would also run the risk of simply papering over the cracks within Mr Berlusconi’s fractious coalition which holds only a narrow majority in parliament and has been weakened by the prime minister’s sex scandals and court cases.

Mr Berlusconi’s People of Liberty party wants to raise the basic retirement age to 67 years from 65 in line with increasing life expectancy, and change the length-of-service pension system that allows some workers to retire earlier.

Giorgio Napolitano, Italy’s head of state, urged the prime minister to adopt the “new decisions of great importance” that he had promised. Strongly pro-European and one of the few Italian politicians still to command widespread public respect, Mr Napolitano said: “Today, more than ever, we are in the same boat on a stormy sea.”

Additional reporting by Gerrit Weissmann in Berlin