New crisis brewing in Italy’s gov’t

Italy’s premier Enrico Letta

ROME – Italy’s fractious ruling coalition struggled on Tuesday to bridge differences over a housing tax that threatens to create a new crisis for a government already severely strained by the legal turmoil surrounding Silvio Berlusconi.

With twitchy financial markets nervous about the prospect of fresh political instability in Italy, the Milan stock market fell for a second day and government borrowing costs rose ahead of a closely anticipated bond auction on Thursday.

Ministers are due to meet on Wednesday to decide what to do about the tax on main residences, which Berlusconi’s centre-right party insists must be scrapped if it is to continue supporting centre-left premier Enrico Letta.

The housing tax has dogged Letta’s unwieldy coalition of traditional rivals ever since it was formed after inconclusive elections in February left no party able to govern on its own.

Senior political leaders including Letta and President Giorgio Napolitano have warned that any threat to the left-right government’s survival would risk a return to the kind of turmoil seen at the height of the euro zone debt crisis, when Italy, the bloc’s third biggest economy, came close to a Greek-style meltdown.

But, despite some signs of progress including proposals to replace the tax with a new local services levy, there has been no firm agreement on where to find the 4 billion euros ($5.35 billion) a year it would take to abolish the tax.

“This is a fundamental policy issue,” Renato Brunetta, a Berlusconi loyalist and lower house leader of his People of Freedom party told RAI state radio.

“The fact that the government has so far failed to present a solid proposal has created a lot of doubt, it’s not serious to proceed in this way,” he said.

Coming on top of mounting tensions over Berlusconi’s future in parliament following his conviction for tax fraud earlier this month, the battle over the housing tax has underlined the severe constraints on Letta in trying to reverse Italy’s worst postwar recession. (Reuters)

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