In a hostile news conference certain to unnerve already jittery financial markets, Mr Berlusconi threatened to withdraw the support of his Freedom Alliance from the emergency mini-budget Mr Dini is hoping to unveil today to plug a 20-trillion lira hole in public finances.
Mr Berlusconi also hardened his demand for early elections, saying the June date he had previously called for was now too late. "We don't have the time to wait until June," he said, proposing a national poll on the same day as regional elections due at the end of April. "Only elections can guarantee the political stability of our country."
Mr Berlusconi appeared to be making his support for the budget conditional on an early election date - a tactic roundly condemned as "blackmail" and a contributory factor to the currency crisis by centrist and left- wing leaders in recent days.
The lira's slide halted yesterday following the Bank of Italy's decision to raise base interest rates by three-quarters of a point. But the currency was still floundering at 1100 or more to the mark, compared with 1060 at the end of last week and around 1040 a few days earlier. Government bond futures fell and Milan's Mibtel share index closed down 1.19 per cent.
Politicians across the spectrum welcomed the surprise rate rise as the only way to stop the rot. But it is likely to complicate Mr Dini's budget- setting task, as the higher cost of financing Italy's runaway public deficit plays havoc with his calculations.
Three-quarters of the proposed mini-budget is made up of direct and indirect tax rises, including higher petrol prices and an increase in value-added tax on basic foodstuffs, to the fury of Mr Berlusconi's supporters, who wanted cuts in public spending.
With Mr Berlusconi declaring open warfare, Mr Dini's chances of working with any kind of serenity to bring about lasting reform now look grim. Financial analysts have already criticised his mini-budget as no more than a stopgap answer to Italy's economic problems; without a few months' breathing space, he is unlikely to do any better with his plans to overhaul Italy's unwieldy pensions system.
Mr Dini made no comment yesterday, but his Foreign Minister, Susanna Agnelli, tried to calm investors by announcing that the government intended to reintroduce the lira to the European Monetary System as soon as possible. Ministers have stressed the underlying strength of the economy.Reuse content