Italy PM Berlusconi wins first confidence vote

Rome:  Italy Prime Minister Silvio Berlusconi knows a good crisis when he sees one. As he faced a crucial no-confidence vote Tuesday that could upend his leadership, he was betting that the financial problems engulfing Europe will provide yet another miraculous salvation for his political career. 

With the debt crisis that began in Greece skipping across southern Europe, Mr. Berlusconi warned lawmakers Monday that bringing down his government would be "political folly," creating a vacuum at the top that could expose Italy to the unwelcome dynamics of economic contagion.

On Tuesday, the Italian leader won a first round of voting in the Senate, where he has a majority, by a margin of 162 to 135, news reports said. But what was expected to be a far closer vote was scheduled in the lower house within hours.

The outcome could either force Mr. Berlusconi from office within weeks or leave him with a weakened government.

Until recently, Mr. Berlusconi sought to keep any talk of Europe's economic crisis out of the limelight for fear of creating a self-fulfilling prophecy and because he worried that any talk of tough-minded measures might only further undermine his waning popularity.

But when borrowing costs for Italy surged after Ireland sought a bailout that made investors even more nervous about nations with high debts and sluggish growth, Mr. Berlusconi saw an advantage in playing up the dangers. 

"At first, they denied the crisis for political and propagandistic reasons," said Prof. Paolo Manasse, who teaches economics at the University of Bologna and at Bocconi University in Milan, "and then they confronted it late and with piecemeal measures."

The Italian government tends to keep information quiet -- or confusing -- so as not to alarm its citizens, Mr. Manasse said, as well as "to avoid conflicts inside the government."

Indeed, in a country where talk rarely matches reality, a quiet tug-of-war has played out behind the scenes between Mr. Berlusconi and his own finance minister, Giulio Tremonti, whom investors credit with steering Italy on a relatively prudent fiscal course.

Clever, ironic and as uncharismatic as Mr. Berlusconi is showman-like, Mr. Tremonti is seen as having accomplished a small miracle: managing Italy's complex finances and politics adroitly enough to placate Mr. Berlusconi's many constituencies while keeping international investors at bay.

Since 2008, he has squeezed modest savings from cuts in financing to ministries, pension reforms, and new incentives for small and mid-size businesses. Markets welcomed the measures, but the government has not highlighted them to avoid alienating important constituencies.

In May, with a budget deficit last year of about 5.3 percent of gross domestic product -- well below the annual deficits in Greece, Ireland and Portugal -- the government was able to get away with a relatively modest austerity program of 24 billion euros, or about $32 billion. That is supposed to cut the deficit to 3 percent by 2012. 

But the government must still push through badly needed structural changes in its economy if it is ever to stoke enough growth to deal with an accumulated debt of 116 percent of gross domestic product, second only to Greece's in Europe's 16-nation monetary union.

Investors fear that splintered politics will make that task nearly impossible, at least in the near term. A political logjam would keep Italy from improving its notoriously low productivity, even as its international competitiveness continues to erode.

"There is no doubt that Italy is now vulnerable to a deterioration of investor sentiment," said Simon Tilford, the chief economist at the Centre for European Reform in London. "If they were to have a period of instability and less prudent management of the country's public finances, that could well prompt more investors to look more askance."

On Monday, Mr. Berlusconi -- who has been prime minister for much of the last 15 years -- blamed his center-left predecessors for running up Italy's debt. Yet critics say it was Mr. Berlusconi's own reluctance to alienate powerful interest groups, including closed professions, regional constituencies and important voting blocs, that thwarted fundamental structural changes -- or any significant legislative achievements -- even when he enjoyed a strong majority.

Now, some investors wonder whether Mr. Tremonti, his finance minister, is in a position to take on a more powerful role as the Berlusconi coalition government stumbles.

Mr. Tremonti is the point man for the powerful Northern League political party, which is pushing "fiscal federalism" that essentially would keep tax revenue in the prosperous north from being siphoned to the less-developed south. That poses a challenge for Mr. Berlusconi, who has always carried southern Italy. 

If Italy goes to early elections next spring, the Northern League is expected to consolidate gains, possibly paving the way for Mr. Tremonti to become prime minister. "You need a figure who will calm market fears," said Luigi Speranza, a senior economist at Unicredit in London. "Tremonti is well regarded because he was behind Italy's recent fiscal consolidation efforts."

Mr. Tremonti is not as outspoken as the Italian central bank governor, Mario Draghi, an economist who has been more public about the need to improve the functioning of the economy. Mr. Draghi is widely seen as harboring ambitions to lead the European Central Bank when its current president, Jean-Claude Trichet, steps down next year.

Gianni Letta, the cabinet under secretary and Mr. Berlusconi's right-hand man, is also seen as a possible successor as prime minister. More kingmaker than king, Mr. Letta recently broke his characteristic silence and voiced concern that Italy risked being a target of speculators.

But Italy's financial fate is not entirely in its own hands. If Spain is attacked anew by financial speculators, Italy could come under pressure again as well. On Monday, Moody's Investors Service lifted its estimated loan losses for the Spanish banking system by more than 60 percent to 176 billion euros, and warned that the banks there could need nearly 20 billion euros in additional capital.

"Depending on what happens with Spain," Mr. Tilford said, "Italy can make contagion more likely and more rapid by mismanaging its fiscal position."

Indeed, whatever the political outcome here on Tuesday, Mr. Tilford added, "Italy isn't out of the woods." 

Rachel Donadio reported from Rome, and Liz Alderman from Paris. Gaia Pianigiani contributed reporting from Rome.