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Analysis: Italy's Berlusconi pressured over austerity mess

File photograph of President of the European Central Bank Jean-Claude Trichet at the ECB headquarters in Frankfurt
File photograph of President of the European Central Bank Jean-Claude Trichet at the ECB headquarters in Frankfurt

By James Mackenzie

ROME (Reuters) - Italy's chaotic efforts to pass a new austerity plan already included disputed figures, policy U-turns and cabinet rows even before Silvio Berlusconi's latest brush with scandal added prostitutes and wiretaps to the mix.

European partners have looked on increasingly aghast as the 74 year-old premier's stumbling center-right government has squabbled over a promised series of measures aimed at bringing down its 1.9 trillion euro ($2,726 billion) debt mountain.

"We're seeing a really striking demonstration of unpreparedness," said Luca Ricolfi, a professor of political science at Turin University and one of Italy's leading political commentators.

"We've known for years that something like this could happen, that our public debt is vulnerable and that speculative attacks are possible," he said.

"But these people are improvising. They're meeting in the evening and trying to do things in 24 hours that require two years of work and preparation," he said.

For the past few weeks, the European Central Bank has offered Rome a breathing space from the market attacks which had threatened to drive its borrowing costs out of control, buying Italian debt to hold bond yields to sustainable levels.

However there has been clear frustration at the confusion surrounding the austerity package, which has seen a series of tax and pension proposals picked up and discarded within days as different government factions fought among themselves.

Berlusconi's PDL party and its Northern League coalition partners have been deeply at odds over the package and Economy Minister Giulio Tremonti has been attacked by other ministers, tired of his abrasive manner and rigid grip on spending.

A tax on high earners, the abolition of small town councils and later retirement ages for some university graduates have all been proposed and immediately abandoned, with vague promises of a crackdown on tax evaders offered to fill the funding gap.

A VAT hike has been mooted by Berlusconi and rejected by Tremonti while in the latest switch, the government has even backtracked on plans to move some public holidays to Sunday and thus deprive Italians of their beloved long weekends.

ECB President Jean-Claude Trichet has called repeatedly for swifter action to fulfill promises of a balanced budget by 2013 and there have been growing questions over how long the central bank will remain patient and keep up its intervention.

Italy's leading daily, the Corriere della Sera, said on Sunday the ECB's intervention had acted like morphine, "a sweet opiate which has deluded us into thinking our illness has been miraculously cured."

However Italian bonds have come under mounting pressure in the past week, with yields now up at 5.2 percent and getting closer to the 7 percent level seen as being unmanageable. Any retreat by the ECB would cause "huge problems," the head of Confindustria, Italy's main employers federation said on Sunday.

SCANDAL

A Greek-style financial emergency in the euro zone's third largest economy would have unknown but undoubtedly disastrous consequences for Europe and the global economy but decisive action has been impossible in Rome's feverish political climate.

At the Ambrosetti forum, Italian industry's annual showcase gathering at Cernobbio on the shores of Lake Como at the weekend, the mood among business leaders was bleak.

"This is a problem about the credibility of our country," Confindustria head Emma Marcegaglia told reporters.

As if to complete a picture of frivolous distraction, Berlusconi has been dragged into a new prostitution scandal, this time involving allegations that he paid more than half a million euros in hush money to a would-be extortionist.

Both he and Giampaolo Tarantini, the businessman at the center of the allegations, deny there were any illicit payments. Tarantini told investigators the billionaire premier had helped him out when he was in financial difficulty.

However the affair has added to doubts about the government's discipline and focus.

Berlusconi's government has long boasted of keeping Italy out of the financial crisis, despite having one of the world's highest public debt levels at 120 percent of gross domestic product and one of its most sluggish growth rates.

Groups as varied as Confindustria and the hardline CGIL union have all condemned the chaos and the center-left opposition has repeated its regular calls for the prime minister to resign and make way for a new government.

Berlusconi has lashed out, accusing the opposition of being anti-Italian "criminals" and repeating his regular attacks on what he says are politically motivated magistrates out to destroy him.

In one of the wiretaps revealed following the arrest of Tarantini on extortion charges last week, the premier added to his long list of memorable sayings, describing Italy a "shitty country" and saying he planned to leave within a few months.

How seriously such a remark should be taken is unclear. It is a commonly heard expression in Italy and was taken from a private telephone conversation in July.

But it has added to a feeling that Berlusconi has become more and more detached and increased speculation that the government may not survive until the next election in 2013.

For the moment, he has a safe parliamentary majority but tensions with the Northern League or even a final breakdown with Tremonti could easily trigger a government crisis

"It's going to be very hard for them to go on like this," Ricolfi said.

(Editing by Myra MacDonald)

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