Fazio is now refusing to go. So Italy has an institutional crisis. As I indicated at the start, and I continue to maintain, we don’t know yet whether or not Berlusconi’s government can survive this crisis. The issue is the need to put Italy in an economic straightjacket. Most government politicians rightly recognise that you can’t do that and go forward to elections. So the Northern League may want elections now, and have a campaign about the euro.

In general elections now may be the best solution, since at least then the new government could begin to address the debt problems.

According to Reuters

The standoff over the Bank of Italy confronted Prime Minister Silvio Berlusconi with a major challenge to his authority after his economy minister resigned having failed to drive defiant central bank chief Antonio Fazio from office.

Berlusconi’s problems were compounded by an open challenge to his leadership from one of his governing partners, prompting the opposition to call for a snap general election which polls show the centre-right ruling coalition would lose.

“Time’s up,” read the headline to a front-page editorial in the Corriere della Sera newspaper, calling on Berlusconi to resign the day after Domenico Siniscalco abruptly quit as economy minister.

But Fazio flew to Washington for meetings of the Group of Seven and the International Monetary Fund, ignoring the prime minister’s plea. “Good night,” Fazio curtly told journalists as he arrived at a Washington hotel.

In comments on a late night TV talk show on Thursday, Berlusconi, for the second time this month, said only the ECB could dismiss Fazio — “if it believes he has broken the law.”

But a senior European Central Bank official rejected the prime minister’s contention that the ECB could fire Fazio.

“The procedures for the dismissal of Fazio are very clear and they involve concerted action between the BOI’s Superior Council, Italy’s prime minister and Italy’s president,” the official told Reuters.

The ECB official said that if Italy wanted to remove Fazio, Berlusconi would have to ask the BOI’s superior council to call an extraordinary meeting with Fazio’s dismissal on the agenda.

Only the superior council, made up of prominent figures from business and academia considered close to Fazio, could revoke his mandate by a two-thirds majority of its 13 members.

Fazio faces an awkward time in Washington, with Tremonti heading out to join him in the Italian delegation. The feisty new economy minister is a longstanding critic of the central bank governor and treats Fazio with barely concealed scorn.

“I’m going to completely ignore him,” Tremonti was quoted as saying by Corriere della Sera newspaper on Friday, adding: “I really want to see his face when he sees me.”

For the first time on Thursday Berlusconi put his leadership into question, offering to debate with restless coalition allies whether he should lead the centre-right bloc into elections.

The centrist Union of Christian Democrats (UDC), one of four coalition partners and for months a thorn in Berlusconi’s side, quickly took up the challenge and snubbed Berlusconi. “There are those who think that the best candidate in 2006 would be Silvio Berlusconi,” said UDC leader Marco Follini. “There are those who, like myself and the UDC, think it isn’t like that.”

Berlusconi is now calling for Fazio to resign. This is – in iteself – an interesting issue – since in theory the Central Bank is politically independent (and indeed Trichet and Barroso seem to have been warning Berlusconi off from doing this for these reasons, Fazio, of course, should have been a gentleman, or have been forced out from within the banking community). Having a new governor under pressure from Berlusconi could have the odd effect of creating the impression that the bank was even more under government influence.

A fine mess.

Silvio Berlusconi, Italy’s prime minister, on Thursday called on Antonio Fazio, the governor of the Bank of Italy, to resign after the country’s finance minister quit in protest at the government’s failure to sanction the governor over a banking scandal.

Mr Berlusconi said after an emergency meeting of his ruling four-party coalition that the “conviction emerged that the stay in office of the governor of the Bank of Italy is no longer opportune, nor compatible with the international credibility of our country”.

http://news.ft.com/cms/s/eaef6064-2b45-11da-995a-00000e2511c8.html

“By keeping Fazio, who is a strong ally of Prime Minister Silvio Berlusconi’s coalition partner Northern League, and ditching Siniscalco, who is a popular but independent politician, the Italian government might actually have become the most stable major government on the European Continent.”"

All I can say is that this is a very weird idea of stability. Strangely the source you cite doesn’t mention the budget issue, which I think is arguably the main one. Clearly you can hold a coalition together if you spend the country into bankruptcy.

“Other Italians, however, recognize that the Euro represents the one chance Italy has had to get its act together.”

This is true I am sure. The question is will it? (Get its act together I mean). At the moment it is spiralling off in the other direction.

@ Doug

I don’t think there is any feasible bailout. Each time something else like this happens, the odds that Italy will be shown the door rise significantly. You have to consider the possibility now that the new budget will ignore the EU conditions, in which case, as the WSJ suggests, ECB and Commission credibility will soon be on the line. The Fazio case has only added to this speculation, since he clearly ignores both of them.

My guess is that Berluconi’s coalition will lose the election, and that they will then use the euro issue, and all the government cutbacks that staying in the euro imply to crucify Prodi.

This will be a bit of a re-run of the Peronists and De La Rua in Argentina in 2001, with the ECB playing the part of the IMF. I just don’t see a vaible way out of their current economics problems without a crash and default.

That would be rather clever, if he could pull it off. [He said innocently.]

Doug M.

By GABRIEL KAHN
Staff Reporter of THE WALL STREET JOURNAL
September 22, 2005 1:54 p.m.

ROME — The sudden resignation of Italy’s finance minister, Domenico Siniscalco, threatens to deepen the economic paralysis in the heart of the euro zone and deals a blow to the already wobbly coalition of Prime Minister Silvio Berlusconi.

With Germany in a political standoff following Sunday’s deadlocked election, the first and third largest economies in the euro zone are groping for economic-policy direction. For Italy the timing is particularly bad. Mr. Siniscalco’s resignation late Wednesday comes just days before he was set to present a crucial budget bill to Parliament.

The immediate effect of the resignation could be to raise further questions about the future of the European monetary union. Both Germany and Italy, along with France, Portugal and Greece, have busted through the euro zone’s stability and growth pact, which is meant to underpin the currency’s soundness by requiring member countries to keep their budget deficits within 3% of gross domestic product. For Italy and Germany, reining public spending back to agreed-upon levels will be more difficult without a firm hand guiding policy.

“This means the stability and growth pact remains a very weak institution for the foreseeable future,” said Nick Eisinger, a sovereign-ratings analyst in London with Fitch, which had already placed Italy on a negative ratings outlook. “This lack of credibility has an impact on the further expansion of the monetary union.”

Behind Mr. Siniscalco’s resignation lurks yet another credibility problem for Italy. The finance minister was one of the most outspoken critics of Bank of Italy governor Antonio Fazio, who is at the center of a controversy regarding whether he abused his powers as banking regulator to prevent a foreign bank from buying an Italian lender, Banca Antonveneta SpA. Prosecutors have recorded Mr. Fazio in wire taps discussing deal details and offering strategy tips with the chief of a rival Italian bank, Banca Italiana Popolare Scarl, which was mounting its own takeover bid for Antonveneta. The wire taps are part of a widening criminal probe, and Mr. Fazio himself could be questioned by prosecutors as early as next week.

Mr. Siniscalco led critics in calling for Mr. Fazio to resign, arguing that the governor compromised his role as banking regulator and damaged Italy’s reputation abroad. But Mr. Fazio, who holds a lifetime appointment, has refused to resign. On Thursday, Mr. Fazio boarded a plane for Washington, D.C., to attend an International Monetary Fund gathering.

Though Mr. Siniscalco argued publicly that Mr. Fazio needed to resign, he received no support from Mr. Berlusconi, who has remained neutral on the issue. His resignation late Wednesday night followed a long meeting with Mr. Berlusconi in which he made one last effort to convince the prime minister. According to a spokesperson for Mr. Siniscalco, the finance minister felt that his only option at that point was to step down himself.

Mr. Berlusconi promised to name a new finance minister Friday after consulting with his coalition partners. Mr. Siniscalco, a technocrat, was tapped last year after his predecessor, Giulio Tremonti, was forced out by political wrangling. This departure comes at a difficult moment for Mr. Berlusconi: His center-right coalition appears increasingly unstable and has been unable to pass crucial legislation, such as a bill to overhaul securities rules, for months. At the same time, he is trying to marshal his forces for national elections in the spring. Mr. Berlusconi has few options for a replacement, and may be forced to rename Mr. Tremonti to the post he left just over a year ago.

Mr. Berlusconi’s greatest liability is the Italian economy, which has been bringing up the rear of an already sluggish euro-zone. Italy is just emerging from a recession and economic output is expected to be flat this year, compared to economic growth of 1.2% for the 12-nation monetary union, according to the IMF.

The sluggish economy and coming electoral cycle raise the risk that Mr. Berlusconi won’t be able to keep government spending in check — a problem that could have repercussions beyond Italy. Rome’s public debt, the third largest by volume after Japan and the U.S., is estimated at more than 109% of GDP, and has begun to rise for the first time in nearly a decade, raising the specter other countries that share the euro may ultimately have to bail Italy out to prevent inflation from undermining the currency’s value.

“Italian Finance Minister Domenico Siniscalco resigned in frustration Sept. 22 after weeks of attempting to convince Prime Minister Silvio Berlusconi to force Bank of Italy Gov. Antonio Fazio to resign. This political reshuffling indicates that Berlusconi’s government is quite solid, making Italy the most stable major Continental government for the first time ever — but probably not for long.

“. . . By keeping Fazio, who is a strong ally of Prime Minister Silvio Berlusconi’s coalition partner Northern League, and ditching Siniscalco, who is a popular but independent politician, the Italian government might actually have become the most stable major government on the European Continent.”

Stratfor then goes on to compare Italian stability favorably in comparison to what is currently going on in France and Germany, noting that Berlusconi may be the first Italian prime minister since WWII to actualy complete a 4 year term.

It is also worth noting that, although Italian governments come and go, the constellation of parties is relatively stable. Until fairly recently, there hasn’t even been any alternation in power between left and right.

Finally, on Italy and the Euro: Bossi can say what he wants, and he represents a certain strain of Italian politics which obviously has some pull in the Berlusconi government since Lega Nord is a vital coalition partner. Other Italians, however, recognize that the Euro represents the one chance Italy has had to get its act together. I haven’t been there in 3 years, and a lot can happen in that time, but I find it hard to imagine that a majority of Italians want to go back to the lira.

http://specials.ft.com/euro/FT3BFQZK0WC.html

Giulio Tremonti, finance minister and one of the most powerful figures in government, also distanced himself from euro euphoria. Asked to comment on the arrival of the euro, he said: “I’m slightly reticent to start walking down a path full of. . . primates waving banners, faith healers, shamans, miracle makers and bankers.”

He added: “I find this idea that the euro will bring peace and end wars particularly odd. Wars end when consumerism triumphs over romanticism.”

I’ve posted this at length, becuase I think it ties in with what Maroni and others have been saying recently. Hostility to the euro isn’t a recent phenomenon in the Berlusconi camp, nor one that is isolated to a couple of ‘nutty’ ministers.

The government faces a crucial week finalises its budget plans under a new finance minister. By law the cabinet must approve the budget by the end of next week and send it to parliament for debate. The budget is very tight as Italy has agreed with the European Commission to put its finances in order after years of flouting rules on deficits.

All the partners in the coalition are pressing for increased spending measures and Mr Siniscalco would have faced a very tough week of negotiations. But people close to the Treasury yesterday insisted that the resignation was related to Mr Berlusconi and Mr Fazio rather than the budget.

Meanwhile Italy’s reputation on the international stage will take a blow this week when the G7 gathers in Washington without Mr Siniscalco. Italy will be represented by Vittorio Grilli, a civil servant who deputises for Mr Siniscalco on the G7. Mr Fazio will attend the meeting and leaves Rome later on Thursday.

http://news.ft.com/cms/s/eaef6064-2b45-11da-995a-00000e2511c8.html