Oct. 26 (Bloomberg) -- The deepening divisions in Prime Minister Silvio Berlusconi’s coalition over how Italy can meet European Union demands for more robust efforts to tame a $2 trillion debt are fueling calls for early elections.
Berlusconi reached an agreement late yesterday with Umberto Bossi, leader of the Northern League party and his key coalition ally, over raising the retirement age. To secure Bossi’s support, Berlusconi agreed to resign in January and hold early elections, newspaper la Repubblica reported today.
“Either this government is able to take structural reforms or we need another government,” Mario Baldassarri, chairman of the Senate Finance Committee and a former Berlusconi ally, said in an interview in Rome today. “We will see in the next few days or week” whether Berlusconi resigns.
Bickering within his Cabinet this week over pensions and other issues prevented the premier from complying with EU requests to deliver a comprehensive plan to boost growth in Italy and tackle the debt at a summit in Brussels. Berlusconi, who has pledged for more than a month to pass a plan for growth, will instead deliver a letter of intent on his plans to the summit today.
“Our Italian friends know very well that we have to expect to be told tonight that there will be considerable, structural consolidation efforts on the part of Italy,” Luxembourg Prime Minister Jean-Claude Juncker said today.
The political gridlock is contributing to a jump in borrowing costs. The treasury paid 3.535 percent today at a sale of 182-day bills, the highest offered on similar-maturity debt in three years. Italy faces almost 200 billion euros ($279 billion) in maturing bonds next year and more than 100 billion euros in short-term debt coming due.
Italy’s 10-year bond yield is almost 6 percent, similar to levels of early August when the European Central Bank began backstopping Italy’s debt and the country pays almost 4 percentage points more than Germany to borrow for 10 years.
Bank of Italy Governor Mario Draghi, who becomes president of the ECB on Nov. 1, said today in Rome that Italy and Europe’s situation was “confusing and dramatic.”
Calls for Resignation
The government’s inability to decide on economic policy has renewed calls among opposition leaders for Berlusconi to quit. Rosy Bindi, the vice president of the Chamber of Deputies for the opposition Democratic Party, called today for Berlusconi to step down and a national unity government to be formed.
Italian business leaders have also pressured Berlusconi to step aside. Il Sole 24-Ore, the newspaper owned by the country’s employers’ lobby, ran a front-page editorial on Sept. 21 calling for Berlusconi to quit.
“Berlusconi’s been on the verge of stepping down for several months now, but he’s always managed to pull off a truce,” Giuseppe Ragusa, professor of political science at LUISS University in Rome, told Maryam Nemazee on “The Pulse” on Bloomberg Television. “This point seems to be the tipping point; it’s very difficult for him to recover.”
Economic growth in the euro area’s third-biggest economy has lagged behind the European average for more than a decade, complicating efforts to reduce the region’s second-biggest debt, even with a balanced budget in reach. Berlusconi has been pledging to release a plan for growth since early September when the European Central Bank sent the government a letter demanding more austerity and measures on growth and debt reduction.
In response, Berlusconi’s Cabinet on Aug. 5 passed by decree an austerity plan that aimed to balance the budget in 2013. The announcement of those measures prompted the ECB to begin buying Italian bonds, helping bringing yields down from euro-era records.
Passage of the package by the Cabinet only intensified the bickering within the government and the plan was overhauled and reworked for weeks, contributing to an 11-day slide in Italian bonds that ended on Sept. 6, a day before the revamped austerity package passed the Italian Senate. The divisions made it impossible for Berlusconi to pass a growth plan and also complicated efforts to appoint a successor to Draghi to head the Bank of Italy.
Political tension spilled onto the floor of the Italian parliament today when lawmakers from Bossi’s Northern League and members of the opposition FLI party exchanged punches. The session was temporarily halted after the scuffle.
“The fact that this government has been weak for so many months now has been slowing the pace of reforms,” Ragusa said.
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