Heading Towards A Bitter 'Finale'?

We've been here several times before, and we know that big surprises are always around the corner with Italian Prime Minister Silvio Berlusconi. However, this time Il Cavaliere's exhausting political twilight might really come to an end. In fact, Berlusconi is due to deliver a keynote speech in the lower house of the Italian parliament tomorrow morning (it was initially expected for this afternoon), outlining his government's priorities for the following months. The programme will then be put to a vote of confidence on Friday. If Berlusconi fails to secure a majority, he will almost certainly have no choice but to step down.

The decision to require a confidence vote is clearly not a bolt out of the blue. Yesterday was a bad day for Berlusconi and his government, which was dealt at least three hard blows. First off, the lower house of the Italian parliament failed to approve the first article of the 2010 budget review - a bureaucratic document whose adoption is usually a mere formality.

Details of the outcome of the vote are key. The government needed a majority of 291, but stopped at 290 votes. Quite significantly, both Italian Economy Minister Giulio Tremonti and the leader of junior coalition partner Lega Nord Umberto Bossi were in the parliament building, but did not take part in the voting, with Tremonti (provocatively?) entering the room a few moments after the verdict. Following the vote, prominent members of Berlusconi's party - including Defence Minister Ignazio La Russa - urged the Prime Minister to verify whether the government is still supported by a majority in parliament.

In the second place, the Italian Court of Auditors slammed the Italian government's draft reform of the tax system, due to uncertainties over its financial coverage. The proposed reform is a centrepiece of the set of austerity measures aimed at achieving a balanced budget by 2013, as it is expected to recover around €20 billion over the next three years (mainly through the abolition of hundreds of tax breaks currently into force).

Finally, the European Commission criticised the Italian government's plans for a tax amnesty, warning that the resort to “non-permanent measures such as a tax amnesty in order to achieve a balanced budget by 2013 harms the credibility of Italy’s deficit and debt reduction strategy.”

In other words, the Italian government is under fire on all fronts. Indeed, Berlusconi was in a similar situation last December, but he managed to win the confidence vote thanks to a bunch of opposition MPs - later remunerated with a few government assignments - defecting to his ruling coalition. However, the situation now looks quite different. Over the past few weeks, Lega Nord leader Umberto Bossi has repeatedly hinted to the possibility of early elections, saying that he thought it "objectively complicated" for the ruling coalition to remain in office until 2013, when the next general elections are scheduled. Therefore, Lega Nord MPs' favourable vote is not a done deal, at least for the moment.

But the worst news for Berlusconi may come from inside his own party, as a group of 'rebel' MPs and Senators led by former ministers Giuseppe Pisanu and Claudio Scajola has been calling for the formation of a "transitional government", possibly open to centre parties. The votes of this group of MPs could be decisive.

The situation looks extremely fluid at the moment, with some media reports suggesting that, due to growing pressure from Lega Nord, Berlusconi might call early elections next year even if he wins Friday's vote. This is not necessarily bad news, despite Italy's precarious economic situation. What Italy badly needs now is a stable and credible government to implement, among other things, the reforms demanded by the ECB (see here and here). After all, the markets are not hanging Spain out to dry, even after Prime Minister José Luis Rodríguez Zapatero announced early elections...