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Last-minute deal breaks stalemate threatening Berlusconi government

The political stalemate that threatened to wreck the coalition government of Italian Prime Minister Silvio Berlusconi and blow a hole through the European Union's crucial debt-crisis summit appears to have been salvaged by a last-minute agreement.

On Tuesday night in Rome, Lega Nord (Northern League) leader Umberto Bossi, Mr. Berlusconi's coalition partner, said the two had agreed on a key pension reform that could be presented to EU leaders on Wednesday.

No details were given and Mr. Bossi told reporters said he still doubted that he and Mr. Berlusconi could overcome all of their differences on the economic fixes demanded by the EU. "I remain pessimistic," he said.

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The Berlusconi-Bossi stalemate rattled the markets because it could not have come at a worse time for the 27 EU countries, 17 of which share the euro. While Greece was the trigger for the debt crisis two years ago, Italy, Europe's most highly indebted country, has emerged as the new epicentre. Without a robust and quick economic reform package from Italy, any EU crisis-fighting measures would lose credibility.

Italy's economy is not strong enough to stave off the Greek debt contagion. The yields on Italian sovereign bonds have been soaring, reflecting investors' fears that the country might not be able to pay off its debt. Global leaders, investors and economists fear that Mr. Berlusconi's government is moving too slowly to revive the economy through reforms such as freeing up the labour markets and trimming pension benefits.

On the same day that Mr. Berlusconi and Mr. Bossi were squabbling, EU officials played down the chance of a breakthrough at Wednesday's summit, though the threats to Mr. Berlusconi's political health could only take part of the blame. The sheer scale of the European repair project seems to be overwhelming the EU leaders and their finance ministers. A meeting of the EU's finance ministers, which was to precede Wednesday's leaders' summit, was cancelled Tuesday without official explanation.

According to the Financial Times, Polish Finance Minister Jacek Rostowski played down the chances of a debt crisis-fighting breakthrough at Wednesday's summit in Brussels, though a broad agreement is still expected.

For weeks, Wednesday's summit has been touted as the deadline to produce a comprehensive crisis-fighting package. Its goals included beefing up the main bailout fund, the €440-billion European Financial Stability Facility; relieving Greece of some of its crushing debt by persuading banks to write down their Greek sovereign bond investments; boosting the capital of Europe's weakest banks; and layering fiscal unity on top of monetary unity.

If the hurdles weren't difficult enough – France and Germany battled each other over ultimate size and use of the EFSF – along came Mr. Berlusconi. On Sunday, in Brussels, he came under enormous pressure to launch reform packages that would lift the country out of its perennial economic doldrums. At one point, French President Nicolas Sarkozy and German Chancellor Angela Merkel ridiculed the Italian leader by smirking and looking skyward when a reporter asked about their views on his commitment to reform.

Then came Tuesday, when Mr. Bossi refused at first to agree on key reform efforts, such as raising the retirement age to 67 from 65 and trimming pension benefits. "You cannot touch pensions," Mr. Bossi told reporters Tuesday, "to please the Germans."

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Mr. Bossi, 70, was born in Lombardy, in northwestern Italy, and, like Mr. Berlusconi, is a former singer. The party he leads has its roots in strong regional parties that advocated greater autonomy from the Italian state and merged into the Lega Nord in 1989.

At times, it advocated secession of the north, which it calls Padania, and has always been anti-immigrant and resentful of southern Italians and Rome itself, which it called "Roma ladrona" – Rome the big thief.

James Walston, a professor and political commentator at the American University of Rome, said Mr. Berlusconi's popularity ratings are at rock bottom and expects the government to fall shortly. Mr. Bossi himself has predicted the government will not see out its mandate, which expires in 2013. "Bossi doesn't care what happens at the EU," he said. "He just doesn't want to go down with the Berlusconi ship."

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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