The European Commission, the EU's executive arm, urged Rome on Monday to demonstrate its commitment to budget cuts and confirmed it was sending a monitoring mission to Italy this week to ensure Berlusconi follows through. Brussels also sent a questionnaire to Rome asking the government to clarify what "concrete action plans" will be undertaken to reduce Italy's 1.9 trillion euro ($2.6 trillion) pile of public debt, which has spooked Europe. "It is essential now that Italy will stick to its fiscal targets, ensure their implementation and intensify the structural reforms that can boost growth," said the European Union's Economic Affairs Commissioner Olli Rehn. Stocks in Milan meanwhile closed up 1.32 percent. The FTSE Mib index has opened with substantial losses but turned around halfway through trading as investors cheered rumours that Berlusconi could be on the point of resigning. "Italy is sufficiently large to destabilise the eurozone," said Cyril Regnat, a bond strategist at French bank Natixis, warning that the country could become a "systemic risk" for the entire 17-nation area. Market pressure has been unrelenting, with the yield on Italian 10-year government debt bonds rising to a euro-era record of 6.67 percent on Monday -- a level considered as unsustainable over the longer term. The European Central Bank, which has been propping up Italy's debt market since August, was again forced to intervene on Monday, traders said.
The coalition between Berlusconi's People of Freedom (PDL) party and the Northern League faces several crucial parliamentary votes in the next few days, and analysts say it appears to no longer have a 316-seat majority. Three deputies of the PDL party have crossed to the centrist UDC since Thursday, and the votes of another score can no longer be guaranteed, while Berlusconi's national popularity has slumped to 22 percent. Giuliano Ferrara, a minister in Berlusconi's first government in 1994 and a long-term ally, earlier predicted Berlusconi's imminent fall saying that a resignation was "the only way out" to avoid "endless political agony." Supporters of the main opposition Democratic Party turned out in their tens of thousands on the streets of Rome Saturday to demand his resignation, accusing the prime minister of dragging the country into bankruptcy. Some Berlusconi opponents have called for a national unity government to pass unpopular reforms, while others want early elections. Northern League leaders have said they prefer elections as a way out of the impasse. Although the current political picture in Italy is far from clear, it appears that the idea that Berlusconi could step down is no longer taboo, including within his normally highly disciplined ranks. According to Il Giornale, which the prime minister's family owns, the party's heavyweights held talks late on Friday to discuss the option of letting Berlusconi's right-hand man Gianni Letta step in. But the scenario is believed to have been ruled out and some analysts argue that pressure from the international community could in fact shield Berlusconi from his opponents by invoking the nation's higher interests. The latest political and financial tensions come after a series of scandals for the playboy politician, who is currently a defendant in three trials for bribery, tax fraud, abuse of power and paying for sex with a 17-year-old girl.
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