Senate vote paves way for Berlusconi exit

Silvio Berlusconi is expected to resign as Italy’s prime minister this weekend, after the lower house of parliament gives final approval to economic reforms agreed with the European Union.

Passage of the measures on Saturday would pave the way for Mr Berlusconi’s resignation.

Italy’s 86-year-old president, Giorgio Napolitano, has resisted Mr Berlusconi’s calls for early elections and insisted on the appointment of Mario Monti, a professor of economics and former European commissioner as prime minister: his government could be sworn in by November 15.

Underlining the depth of international concern over the wider threat posed by the collapse of market confidence in Italy, Mr Napolitano has fielded phone calls from his counterparts in Washington, Paris and Berlin.

Nicolas Sarkozy, the French president, called Mr Napolitano to express his “confidence in the determined and effective action” of the Italian head of state as he tries to put in place a national unity government.

“Italy has a potentially high economic performance, yet it needs huge efforts to unleash it in a structural and permanent fashion,” Herman Van Rompuy, president of the EU, said, speaking at the European University Institute near Florence on Friday. He added that both Europe’s and Italy’s fate were “at stake”.

In a sign of US anxiety about the European crisis, Janet Yellen, vice-chairwoman of the Federal Reserve, told a conference on Friday that it poses “significant downside risks to the US economic outlook” and called for “forceful action to stabilise the situation”.

“Some major European banks that obtain appreciable short-term wholesale US dollar funding from US money market funds appear to be facing significant funding pressures,” she said, Ms Yellen added that the Fed was “actively engaged” in monitoring the exposure of US banks.

The reforms that Italy’s parliament are expected to pass, however, will have only a limited and delayed impact on cutting the country’s deficit and boosting growth, forcing Mr Monti to prepare more drastic measures.

Officials said one option under consideration was an overnight tax on bank deposits.

Giuliano Amato, tipped as a possible minister under Mr Monti, did that in 1992, two weeks after becoming prime minister. But the levy on each account was only 0.6 per cent and, even with a property tax, was not enough to stop the lira from leaving the European Monetary System.

Markets reacted positively on Friday. After sparking a panic on global markets, Italy’s sovereign bond market has rallied strongly over the past two days, dragging the country back from the financial precipice.

The rally has tightened the yield on Italy’s 10-year benchmark bond by 1 percentage point since its 7.45 peak on Wednesday.

Italy’s markets regulator also announced that it would ban naked short selling of all Italian shares from December 1.