Italy's centre left will not accept any "blackmail" from its centre-right coalition partner, its leader said today, after Silvio Berlusconi's party threatened to bring down the government if he is ejected from parliament.
Relations between Berlusconi's People of Freedom (PDL) party and Prime Minister Enrico Letta's Democratic Party (PD) are at breaking point ahead of a Senate vote due by October on whether to expel the media mogul over his tax fraud conviction.
Following a party summit over the weekend at Berlusconi's Milan villa, members of the PDL said his removal from parliament was "unthinkable" and openly threatened to bring down the government if their PD coalition partners vote to evict him.
"The PD rejects any blackmail or ultimatum from the PDL," PD secretary Guglielmo Epifani told the daily newspaper la Repubblica today, reaffirming that his party would vote in favour of Berlusconi's removal from parliament.
"Berlusconi needs to take note of what led to his conviction, and he has to explain why he would bring down the government at a time of crisis."
He warned that if the government collapsed just as the euro zone's third-largest economy was showing the first signs of recovery after a two-year recession, there would be "enormous costs" for society and renewed tremors in financial markets.
Letta is trying to push on with reforms to spur growth and fight record levels of unemployment despite deep divisions in his coalition, which was cobbled together after inconclusive elections in February.
Bond markets have calmed and Italian borrowing costs have declined well below levels that triggered concern during the height of euro zone turmoil in 2011, when Berlusconi resigned as premier to make way for a technocrat government.
However, the difference in yield between Italian 10-year bonds and their German counterparts widened slightly as investors worried about a potential government collapse.
"It doesn't look like the politicians will find a compromise to get out of this crisis, which puts all measures that need to be taken to spur the economy on ice," said a Milan trader.
"There is the risk that this could hit our economic recovery at a time when the country has shown some signs of a pick-up," he said.
Letta said yesterday it would be "madness" to bring down his government at such a sensitive time, but said he was confident the administration could resolve its problems.
The coalition partners are also arguing over an unpopular housing tax reform which they are due to agree on Wednesday. The PDL has threatened to bring down the government if the reform is not abolished, but centre-left officials say there are not enough alternative resources to scrap it completely.
The cabinet is also due to meet later today to agree on measures to cut public administration spending.