Letta’s Survival Skills Tested in Berlusconi Tax Showdown

Italian Prime Minister Enrico Letta faces a test of his political survival skills as he squares off against Silvio Berlusconi, the embattled former premier whose support is keeping the coalition government afloat.

A first challenge comes in a 5 p.m. cabinet meeting in Rome today, when Letta will propose reducing an unpopular real-estate tax imposed last year as an emergency austerity measure. Berlusconi wants to scrap the bulk of the levy, and should he decide that Letta’s cuts don’t go far enough, he could retaliate against the government.

Renato Brunetta, head of Berlusconi’s People of Liberty party in the lower house of parliament, said before the meeting that the tax would be cancelled for primary residences and agricultural land this year, as the former premier had demanded.

A deal would bolster the government’s stability in the short-term and give Letta two weeks to brace for the next challenge -- impeachment proceedings against Berlusconi scheduled to start on Sept. 9 that once again pit the People of Liberty against Letta’s traditional allies in the Democratic Party.

“There will finally be a solution,” Brunetta said in a statement on the People of Liberty parliamentary website. “We are working to define the coverage in a serious, responsible and transparent way.” A spokeswoman in Letta’s office declined to comment.

Investor Pressure

The benchmark FTSE MIB Index, under pressure this week from investors concerned that Letta, 47, won’t be able to keep his coalition intact, erased losses after Brunetta’s comments, and was up 1 percent at 4:34 p.m. in Milan. The Stoxx Europe 600 Index was down 0.4 percent. The difference between yields on Italy’s 10-year debt and similar-maturity German bunds fell 6 basis points to 254 basis points.

The prime minister has nurtured his alliance of rival parties since its inception in April by postponing potentially divisive issues, like the property tax cut, and sidestepping commentary on Berlusconi’s criminal convictions.

The property-tax debate pits Letta’s commitment to budget discipline against Berlusconi’s demands for fiscal stimulus. Berlusconi has called the levy unjust and vowed to fight to cancel it for primary residences. While the government is seeking funds to ease the tax and meet its deficit targets, Finance Minister Fabrizio Saccomanni said on Aug. 8 that full cancellation wasn’t the best course.

‘First Showdown’

Deputy Prime Minister Angelino Alfano, general secretary of People of Liberty, has said in the last two days that a deal is possible. Alfano said yesterday he had a “constructive meeting” with Saccomanni.

Today’s cabinet meeting is “the first showdown,” said Fabrizio Fiorini, chief investment officer at Aletti Gestielle SGR SpA in Milan. “Letta has every possibility to prevent Berlusconi from playing the victim and delaying the conflict until Sept. 9.”

Cesare Mirabelli, a former president of Italy’s Constitutional Court, said Berlusconi may have the most to lose from triggering a snap election by bringing down the government.

With a vote this year, “Berlusconi’s bullets would be blunted,” Mirabelli said by telephone.

The former premier may be prevented from running in the next campaign because of a December 2012 law designed to prevent corruption in politics. People sentenced to more than two years in prison are barred from contesting elections and serving in parliament for at least six years, according to the law. While Berlusconi is unlikely to spend a day in jail, due in part to leniency guidelines, his sentence carries a four-year prison term.

Senate Vote

The process to strip Berlusconi of his Senate seat begins with a committee meeting in the upper house and may take weeks or months before an eventual vote in the full chamber is called. Letta’s Democratic Party, the biggest force in the ruling coalition, has said Berlusconi’s expulsion is required by the anti-corruption law.

People of Liberty, the second-biggest party, claims the law is unconstitutional and shouldn’t be applied to Berlusconi, whose conviction stems from tax fraud in 2002 and 2003.

The People of Liberty party is pressuring parliament to request a Constitutional Court opinion on the matter, which would freeze the effects of the law. It would then take the court “up to six months” to decide whether to rule on the request, Mirabelli said. Parliament could also amend the law to exclude its retroactive application, Mirabelli said.

Tax-Fraud Conviction

“That would save Berlusconi from losing his Senate seat, but ultimately the public-office ban, to be determined by the appeals court, would kick in,” Mirabelli said. Italy’s top court on Aug. 1 upheld Berlusconi’s tax-fraud conviction and asked the appeals court to review a five-year public office ban imposed by the original ruling. The appeals court could rule as early as November, while Berlusconi would have the right to a last appeal to the highest court, which would take “another three or four months,” Mirabelli said.

Berlusconi is also appealing convictions in separate criminal cases for illegal use of wiretaps, abuse of power and engaging a minor in prostitution. He has denied all charges.

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