Berlusconi's children under investigation

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Assailed from every side, the Italian Prime Minister Silvio Berlusconi is facing his most difficult days since coming to power three years ago.

Now, on top of his political woes, it has been revealed that his two eldest children are being investigated.

Piersilvio Berlusconi, vice-president of Mediaset, the family firm that owns Mr Berlusconi's television channels, and his sister Marina, who works for the family finance company, Fininvest, are under investigation for suspected money-laundering and receiving stolen goods.

The investigation concerns the purchase of television rights for American films by Mediaset in the 1990s. Mr Berlusconi himself, named in a large number of other cases, is being investigated for alleged tax fraud, embezzlement and false accounting in this case. When news of the investigation broke, Niccolo Ghedini, a family lawyer, thundered about the "absolute baselessness of the news", adding that the two were still at university during the years in question and had no involvement in the family's business affairs.

But late yesterday prosecutors in Milan confirmed that the investigation was in progress, and had in fact been under way for the past four months.

Meanwhile Mr Berlusconi, who is also acting Finance Minister, has just seen Italy's credit rating drop, the first time his has happened to a eurozone country. The news came days after he was forced to sack his finance minister by coalition allies who threatened to bring down the government. On Wednesday Standard and Poor's rating agency cut Italy's sovereign credit rating to AA-, the lowest in Western Europe.

Mr Berlusconi must deliver long promised tax cuts worth €12bn (£8bn) if he is to swing public opinion behind him again and win the next election, due in spring 2006. But if tax cuts are not to lead to a further ballooning of the budget deficit, and a further slump in Italy's rating, they must be matched by deep cuts in public spending. Mr Berlusconi and his coalition allies have been bickering for months over those cuts.

And other problems are piling up. Yesterday the EU announced it was suing the Italian government for its consistent policy of buying Italian-made Agusta helicopters without putting the order out to tender. And the day before it was learnt that the EU had rejected Mr Berlusconi's scheme to bail out Italy's bankrupt football clubs.

But Mr Berlusconi's central problem is the economy. "Berlusconi is blocked in an ideological impasse," says Federico Rampini of La Repubblica. "If he doesn't keep the promise to cut taxes contained in his Contract with the Italians" - a winning stunt in the last general election - "Berlusconi knows that he is signing the end of Berlusconism. But this tax cut cannot be achieved."

Over at Corriere della Sera, Francesco Giavazzi believes the tax cut could be achieved, but only by transforming the government's performance. "Accelerate privatisation, liberalise the markets, starting with professionals, bring in new norms on savings and a new law for the Bank of Italy: in other words, balance the tax cut with a Thatcher-style shock."

But this seems a long way from happening. In three years of government, with a large majority and a confidant as finance minister, Mr Berlusconi failed to do any of those things. After last month's bad election results he has much less room for manoeuvre. Now he is at the mercy of squabbling allies - the default mode of post-war Italian politics.