Furious at his coalition partner of the past five months, Enrico Letta, Italy’s embattled prime minister, has denounced Silvio Berlusconi’s decision to bring down their joint government as “mad and irresponsible”.

Financial markets at Monday’s opening bell will judge the cost to Italy of Mr Berlusconi’s latest twist, but rather than insanity it is the veteran campaigner’s Machiavellian approach to politics that is driving events.

Mr Berlusconi, who turned 77 on Sunday, insists he ordered his five centre-right ministers to resign from the government in answer to the cabinet’s decision on Friday night not to block a scheduled increase in sales tax from October 1.

Mr Letta called that statement an “enormous lie that Italians will see through”, accusing the former prime minister of triggering the crisis because of his personal predicament in facing expulsion from the Senate and a ban on holding public office as a result of his August 1 court conviction for tax fraud.

An Italian official, who attended the Friday cabinet meeting and asked not to be named, said Mr Berlusconi had sprung a cleverly prepared trap. Mr Letta had proposed an alternative to increasing value added tax, which would have involved other rises including increasing the cost of petrol. But Mr Berlusconi’s ministers agreed to go ahead with the VAT increase, getting the pretext they needed to bring the coalition down.

“Berlusconi is a gambler but he is not insane,” the official said. “He knows he can only base his election platform on the tax issue, not on his personal court battles.”

A second official involved in the fraught negotiations between the two parties on how to keep the budget deficit within the 3 per cent limit agreed with Brussels was also of the view that Mr Letta and Fabrizio Saccomanni, finance minister, had miscalculated over the VAT issue and should have adopted bolder measures, such as spending cuts.

Whether Mr Berlusconi intends to press for snap elections or to use his leverage to dictate the government’s fiscal policy over the next two months of budget debate, it is clear that the threat of a political crisis will never be far away.

“Markets have grown accustomed to Italy’s dysfunctional politics, but there’s a sense that things are now spinning out of control, with potentially dangerous consequences for both Italy and the eurozone,” commented Nicholas Spiro, a London-based sovereign debt analyst.

“For some time now, the issue in Italy has no longer been about whether much-needed reforms can be undertaken, but rather whether Mr Letta’s paralysed government can make it until Christmas,” he added.

Mr Letta’s sense of humiliation is palpable. Last week the 47-year-old premier advertised Italy to potential investors in New York as “young, virtuous and credible” only to return to Rome the next day to find his government held to ransom by Mr Berlusconi.

Portrayed by media critics as a weak politician of good intentions, Mr Letta is trapped between the fiscal constraints imposed by Brussels and the manoeuvring of his coalition partners driven by their leader’s political demise at the hands of a judiciary they see as dominated by leftists.

Mr Letta has not been able to shake off the impression of being rooted in his origins as a Christian Democrat more inclined towards negotiating compromises than taking decisive action.

But if he can see off the threat by Mr Berlusconi without giving ground and keep his government afloat by courting dissidents on the centre-right and from the opposition Five Star Movement, then Mr Letta could also see off a threat to his leadership from within his own Democratic party from Matteo Renzi, Florence’s young reformist mayor and aspiring prime minister. Mr Letta’s address to parliament, expected on Monday or Tuesday, could be his moment to prove his detractors wrong.

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