Berlusconi Loses Federalism Vote, Testing Loyalty of Northern League Ally

Italian Prime Minister Silvio Berlusconi lost a parliamentary vote today on a law giving more power to local governments, a setback that may lead to early elections.

The parliamentary committee for fiscal federalism was split 15-15 in a vote to activate the law designed to give more tax power to cities. The draw counts as a rejection and will test the Northern League party’s willingness to sustain Berlusconi’s majority in parliament. The League had threatened to push for elections two years early if the measure failed to pass.

Northern League leader Umberto Bossi said he “didn’t think” he’d move to force early elections after meeting with Berlusconi in Rome after the vote. The comments contradicted remarks by his chief lieutenants prior to the balloting.

“If federalism doesn’t pass, we’ll all go home,” Interior Minister Roberto Maroni, a party leader, told Corriere della Sera in a Jan. 31 interview.

Enrico La Loggia, the member of Berlusconi’s People of Liberty party who heads the committee, said after the vote that the government will approve activating the law through a decree. Such a move would force another vote in the entire Chamber of Deputies within 60 days of the decree.

Prostitution Allegations

The setback for Berlusconi, 74, comes as he faces possible criminal charges of engaging in prostitution with a minor. Investor concern that political instability will make it more difficult for the government to confront fallout from Europe’s debt crisis has boosted borrowing costs. The premium investors demand to hold Italy’s 10-year bonds over comparable German debt was at 136 basis points, down from a euro-era high of 212 on Nov. 30., though still more than twice the average of the past decade.

Berlusconi may find it increasingly hard to resist pleas for him to step aside as prosecutors push ahead with a criminal investigation into allegations Berlusconi paid for sex with underage women. Milan Prosecutor Edmondo Bruti Liberati said yesterday he will file a request as soon as Feb. 7 for the start of the trial. Berlusconi also faces possible charges of abuse of power for helping get the woman released from police custody in an unrelated detention.

Berlusconi’s ‘Waterloo’

“It’s quite difficult to form a judgment on how much closer Berlusconi would be to ‘facing his Waterloo’ if the tax transfer package is not approved by the parliamentary commission,” said Marc Ostwald, a London-based strategist at Monument Securities Ltd. “The noises coming out of the Northern League are as ever incoherent, with Maroni blustering about forcing a general election, but others tip-toeing around what they might do.”

The probe, known as Ruby-gate after the nickname of the young woman at its center, has left the government paralyzed, said Michele Ventura, deputy head of the main opposition Democratic Party’s delegation in the Chamber of Deputies. Opposition parties backed by women’s groups plan national demonstrations on Feb. 13 to call for Berlusconi’s resignation.

“If the magistrates really do manage to bring charges this week in the Ruby case, it would beggar belief that Berlusconi could carry on hanging on for dear life, even though the history of his career suggests that he will not be willing to stand down,” Ostwald said.

Approval Rating

Berlusconi’s popularity held at 35 percent last month, matching the lowest level since his re-election in 2008, IPR Marketing said in a poll released yesterday and based on a survey of 1,000 adults. Still, Ruby-gate does not appear to have further eroded his support and Berlusconi’s coalition would likely still win early elections, IPR said.

Berlusconi has said he’s willing to be questioned by prosecutors on the condition that the trial is moved to the tribunal of ministers, citing an alleged bias against him by the Milan court. That special three-judge panel oversees cases against government ministers. Such a move could buy him more time, according to former prosecutor Antonio Di Pietro, leader of the opposition Italian Values Party.

The probe announced last month comes after dozens of lawmakers quit the ruling People of Liberty party, prompting a confidence vote on Dec. 14 that almost brought down the government. The defection was led by long-time ally Gianfranco Fini and left Berlusconi scrambling for a working majority in the lower house of parliament.

To contact the reporters on this story: Flavia Krause-Jackson in Rome at fjackson@bloomberg.net; Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; Craig Stirling at cstirling1@bloomberg.net

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