Berlusconi under pressure as eurozone spotlight shifts to Italy

The Italian Prime Minister dismissed reports that he was considering stepping down in favour of early elections, saying they were “without foundation.”

However, Mr Berlusconi faces a crunch vote on public finance today amid fears that 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 and increasingly the Italian leader himself is being seen as the problem.

The biggest fear is that Italy cannot pay for its £1.6 trillion debt and needs international help. Europe would struggle with a bailout that large, meaning a default that could break up the 17-nation eurozone and leave the global economy in chaos.

The yield on Italy’s 10-year bonds jumped to 6.67 per cent, its highest level since the euro was established in 1999 and uncomfortably near the seven per cent 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 yesterday, sparking Italian media to speculate he was devising an exit strategy. But speaking later on his Facebook internet page he said “the reports of my resignation are without foundation.”

However, public administration minister Renato Brunetta, a Mr Berlusconi loyalist, acknowledged that the government had a “numbers problem” in parliament and if a majority was lacking then “everybody goes home.”

Concerns over Italy are overshadowing developments in Greece where the two biggest parties resumed talks on who should be the new prime minister after agreeing a power-sharing deal to accept a financial rescue package. Fellow European governments will want concrete progress when eurozone finance ministers meet to discuss unfreezing bailout loans kept on hold while the country sorted out its political turmoil.

Speaking yesterday, Nick Clegg said Greece’s “haltingly” moving towards honouring the eurozone bailout package.

But the Deputy Prime Minister warned that UK jobs would be lost without Greek backing for the deal and its continued membership of the eurozone.

Mr Clegg said in a BBC interview: “In a sense, if you step back for a minute, no wonder that it creates a lot of political ructions because, quite rightly, the effect of this package is to ask countries to get to grips with their debt problems, to show they have got a plan how to do that, and to show they have got a plan to create sustainable long-term growth in their economies.

“That is asking governments to do big things which, arguably, in some cases, they have ducked for a very long time.”

He added: “What we are seeing, haltingly, is a move forward towards a situation in Greece where they can honour the terms of the package agreed in the eurozone.

“I think it is in Greece’s interest and also in the eurozone’s interest, and therefore the United Kingdom’s interest, not to see countries fall out of the eurozone because it would have a huge domino effect which, let’s be quite clear, would cost people’s jobs and livelihoods here in the United Kingdom.

“So it is not something we should wish for in any way at all.”