Now Berlusconi faces his biggest test

After last week's Greek shenanigans, the future of the euro now depends on ability of Italy's premier to rein in his country's spending.

Tomorrow, the markets will start to place their bets on the likelihood of Silvio Berlusconi stopping the eurozone debt contagion spreading beyond Greece to lands that are too big to be rescued. Italy will begin, under International Monetary Fund supervision, to see if his government can rein in the spending that has already seen its debts reach 120 per cent of its entire GDP.

Thus will the stability of the eurozone be handed into the care of Europe's flakiest leader. It was not reassuring when, even after effectively being placed on probation by the IMF, Mr Berlusconi told Italian television: "Life in Italy is good. The restaurants are full. It's difficult to get a seat on a plane they're so busy; holidays are all booked up." At least in Athens yesterday there was a genuine sense of crisis, with solemnity to match.

Mr Berlusconi may feel differently on Tuesday, when the first of the votes on reforms to which he is now committed takes place, but just a few days ago he arrived at the G20 in characteristic fashion. His overcoat draped over his shoulders, he stepped from his limousine, and was soon caught by the cameras appraising the contours of Argentina's President, Cristina Fernandez de Kirchner, with a roué's smile. But, by the meeting's end, he'd been told with more force than ever before that he tends to spend far too much time studying the wrong kind of figures.

From tomorrow, his survival (and possibly that of the eurozone as we know it) will depend on only one vital statistic: the amount by which he can reduce Italy's debt. And to make sure he – or, if he falls, his successor – sticks to the task, an IMF monitoring mission will be invigilating Italy's efforts to reduce spending.

Yesterday, it was politics as usual in Rome: tens of thousands of demonstrators calling for his resignation, and Mr Berlusconi's routine refusal. He has promised a confidence vote on new legislation sought by the European Union to shore up Italy's economy. The measures include a plan to sell government assets, tax breaks to encourage employment for the young, and getting women back into the workforce. The legislation would also liberalise store opening hours and open closed professions.

The stakes for the country, the eurozone and the world economy could hardly be higher. Italy has debts of €1.9trn. It is the third-largest economy in the zone, and, unlike Ireland, Portugal or Greece, is far too large to bail out. If it defaulted, the basis of Western finance would be in shreds.

Mr Berlusconi, who recently rejected a proferred IMF line of credit, has been promising effective reforms for years, and insisting Italy was on track to rein in its public debt. He claimed his parliamentary majority was strong enough – despite mounting talk of defections on his own side – to pass legislation in the coming weeks containing an initial batch of reforms to sell off government property and privatise some local public services.

Among reforms are a rise in the pension age to 67 by 2026, a loosening of job protection, and new rules allowing civil servants to be put on so-called Cassa Integrazione, mandatory stand-down at minimum pay.

But the Italian Prime Minister, a born survivor incessantly besieged by litigation largely of his own making, has failed to deliver, and market confidence has withered in recent weeks. On Friday, Italy's benchmark 10-year bond yield jumped 0.32 of a percentage point to 6.43 per cent, indicating a surge in investor worries about the country, and, in particular, Mr Berlusconi's credibility.

The IMF chief, Christine Lagarde, said she hoped a quarterly monitoring mission would start by the end of November to check that the reforms Mr Berlusconi promised in a letter to the EU last month are implemented.

In Greece, the more pressing eurozone basket case, the political gamesof chicken continued yesterday. Prime Minister George Papandreou won an early-morning confidence vote in the socialist-led parliament on a pledge that he was willing to step aside and form a cross-party caretaker government. But yesterday afternoon the country's conservative opposition leader insisted on his demand for immediate elections, snubbing a government offer to form a power-sharing coalition. The centre-right New Democracy party leader, Antonis Samaras, described Mr Papandreou as "dangerous for the country", but did not say whether he would attend any negotiations with the government. Yesterday morning, Mr Papandreou met President Karolos Papoulias. He said at the meeting: "I am concerned that a lack of co-operation could trouble how our partners see our desire to remain in the central core of the EU and the euro." The country's creditors have threatened to withhold the next critical €8bn loan instalment until last week's new debt deal is formally approved in Greece.

The country is surviving on a €110bn rescue-loan programme from eurozone partners and the IMF. It is currently finalising a second mammoth deal: to receive an additional €130bn in loans and bank support, with banks agreeing to cancel 50 per cent of their Greek debt. His colleagues insist any new government would need until late February to secure the second deal, and have warned that a snap election could scuttle it. They insisted Mr Papandreou's offer to step aside was sincere, and called on Mr Samaras to reconsider his party's position urgently.

"If Mr Samaras were willing to back a new government, the Prime Minister would resign today," said Yiannis Magriotis, a deputy public works minister. Political analyst Ilias Nicolacopoulos argued it would be difficult for Mr Samaras to avoid the coalition talks altogether – even if he remains reluctant to share power with Mr Papandreou. "There will be a tough game of poker to determine what type of government can be formed," he said.

The extent to which events in Rome and Athens rendered the G20 summit a fringe production was illustrated on Thursday evening, when journalists dropped what they were doing in the basement of Cannes' Palais des Festivals to watch a live transmission from the Greek parliament in Athens, where Mr Papandreou was speaking.

The most likely way the eurozone could still get additional financing is through a special account under the auspices of the IMF, into which individual countries could make payments. Those investments in turn could then be used to boost the eurozone's own bailout fund, the €440bn European Financial Stability Facility. That way, countries such as the United States, which think Europe should pay for its own financial problems, wouldn't have to put any money in. And countries such as Russia and Brazil, which have expressed interest in investing in the eurozone, could.

But Germany's Chancellor Angela Merkel and Ms Lagarde said not a single country at the meeting made a firm commitment to participate.

Greece's long week

Tuesday Greece's Prime Minister, George Papandreou, announces referendum of the Greek people on the bailout package which says that, in return for austerity measures, banks owed money by Greece will accept losses of 50 per cent. The announcement causes surprise in Greece, and outrage in Brussels, where it is interpreted as a betrayal of assurances given. Market anxiety increases.

Wednesday Bailout funds of €8bn promised to Greece are postponed pending the holding of the referendum. There is growing market anxiety over Italy's stability after the cabinet fails to agree on a package of reforms.

Thursday Beijing opts to reject the eurozone appeal for investment in the European Financial Stability Fund. Mr Papandreou begins negotiations with the opposition on the formation of a coalition government, ahead of a parliamentary confidence vote on Friday night. Mr Papandreou causes confusion when he suggests that he may be open to cancelling the planned referendum.

Friday Greece drops idea of referendum. The G20 summit in Cannes is dominated by eurozone issues. Attendees commit to boosting the IMF's funding. The IMF and European Commission demand faster action on pension and labour market reform from Italy.

Yesterday Mr Papandreou narrowly survives a parliamentary confidence vote at a late-night parliamentary session. He promises to continue negotiations form a coalition government.

The future: The damage could dwarf even Lehman Brothers' collapse

Short term

George Papandreou, having survived a confidence vote on Friday night, must form a new coalition government. This could take about a week, but is already under threat from opposition party calls for snap elections. Such a move would inevitably delay government approval of the terms of the country's latest international bailout package, worth €130bn. Without those funds Greece will almost certainly default on its existing loans and go bankrupt next month. Italy's borrowing costs remain unsustainably high and the contagion effect of any further disasters in Greece could mean that Silvio Berlusconi will have to rethink turning down the offer of an IMF loan.

Medium term

If Greece is bankrupted, its membership of the euro must surely come to an end. The cost of borrowing for other countries would soar, which would almost certainly lead to yet another banking crisis – only, this time, one with the potential to dwarf the catastrophic effects of the Lehman Brothers collapse in 2008. Already it is unclear how Italy is going to refinance €300bn next year, though the IMF is sending monitors to Rome to issue quarterly updates on the country's economic progress. Spain will continue to slash public spending, particularly if, as expected, the PP opposition party wins this month's election. The party has promised to restore Spain's top credit rating, which will require the acceleration of spending cuts.

Long term

Eventually, France will have to stop providing so much money to the bailout funds. Its top credit rating would ultimately go, the consequence being that the European Financial Stability Facility's lending capacity would fall by at least one-third. If the rescue fund drops sharply, the worst-hit countries would lose much of the one source of funding that is keeping them afloat. Should confidence in the French economy fall, that would leave just the biggest, most important eurozone country left in the crosshairs of the crisis: Germany.

Start your day with The Independent, sign up for daily news emails
A survey carried out by Sainsbury's Finance found 20% of new university students have never washed their own clothes, while 14% cannot even boil an egg
science...and the results are not as pointless as that sounds
politicsIs David Cameron trying to prove he's down with the kids?
Dominique Alderweireld, also known as Dodo de Saumure, is the owner of a string of brothels in Belgium
newsPhilip Sweeney gets the inside track on France's trial of the year
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Cumberbatch was speaking on US television when he made the comment (Getty)
Life and Style
Arts and Entertainment
Tom DeLonge, Travis Barker and Mark Hoppus of Blink-182 pictured in 2011.
musicBassist Mark Hoppus and drummer Travis Barker say Tom Delonge is 'disrespectful and ungrateful'
Arts and Entertainment
Olivia Colman and David Tennant star in 'Broadchurch'
tvBroadchurch series 2, episode 4, review - contains spoilers
cyclingDisgraced cycling star says people will soon forgive his actions
Britain's Prince Philip attends a Garden Party at Buckingham Palace in London
Arts and Entertainment
Ed Sheeran will play three sell-out gigs at Wembley Stadium in July
Lena Dunham posing for an official portrait at Sundance 2015
Arts and Entertainment
Under the skin: Sarah Kane in May 1998
theatreThe story behind a new season of Sarah Kane plays
Arts and Entertainment
Preening: Johnny Depp in 'Mortdecai'
filmMortdecai becomes actor's fifth consecutive box office bomb
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Recruitment Genius: Sales Representative

£18000 - £20000 per annum: Recruitment Genius: To promote and sell the Company...

Recruitment Genius: Project Engineer

£30000 - £40000 per annum: Recruitment Genius: An exciting opportunity has ari...

Recruitment Genius: Project Manager - Civil Engineering

£35000 per annum: Recruitment Genius: The Business: This company is going thro...

Tradewind Recruitment: KS1 & KS2 Teachers Required

Negotiable: Tradewind Recruitment: Tradewind Recruitment are currently working...

Day In a Page

Woman who was sent to three Nazi death camps describes how she escaped the gas chamber

Auschwitz liberation 70th anniversary

Woman sent to three Nazi death camps describes surviving gas chamber
DSK, Dodo the Pimp, and the Carlton Hotel

The inside track on France's trial of the year

Dominique Strauss-Kahn, Dodo the Pimp, and the Carlton Hotel:
As provocative now as they ever were

Sarah Kane season

Why her plays are as provocative now as when they were written
Murder of Japanese hostage has grim echoes of a killing in Iraq 11 years ago

Murder of Japanese hostage has grim echoes of another killing

Japanese mood was against what was seen as irresponsible trips to a vicious war zone
Syria crisis: Celebrities call on David Cameron to take more refugees as one young mother tells of torture by Assad regime

Celebrities call on David Cameron to take more Syrian refugees

One young mother tells of torture by Assad regime
The enemy within: People who hear voices in their heads are being encouraged to talk back – with promising results

The enemy within

People who hear voices in their heads are being encouraged to talk back
'In Auschwitz you got used to anything'

'In Auschwitz you got used to anything'

Survivors of the Nazi concentration camp remember its horror, 70 years on
Autumn/winter menswear 2015: The uniforms that make up modern life come to the fore

Autumn/winter menswear 2015

The uniforms that make up modern life come to the fore
'I'm gay, and plan to fight military homophobia'

'I'm gay, and plan to fight military homophobia'

Army general planning to come out
Iraq invasion 2003: The bloody warnings six wise men gave to Tony Blair as he prepared to launch poorly planned campaign

What the six wise men told Tony Blair

Months before the invasion of Iraq in 2003, experts sought to warn the PM about his plans. Here, four of them recall that day
25 years of The Independent on Sunday: The stories, the writers and the changes over the last quarter of a century

25 years of The Independent on Sunday

The stories, the writers and the changes over the last quarter of a century
Homeless Veterans appeal: 'Really caring is a dangerous emotion in this kind of work'

Homeless Veterans appeal

As head of The Soldiers' Charity, Martin Rutledge has to temper compassion with realism. He tells Chris Green how his Army career prepared him
Wu-Tang Clan and The Sexual Objects offer fans a chance to own the only copies of their latest albums

Smash hit go under the hammer

It's nice to pick up a new record once in a while, but the purchasers of two latest releases can go a step further - by buying the only copy
Geeks who rocked the world: Documentary looks back at origins of the computer-games industry

The geeks who rocked the world

A new documentary looks back at origins of the computer-games industry
Belle & Sebastian interview: Stuart Murdoch reveals how the band is taking a new direction

Belle & Sebastian is taking a new direction

Twenty years ago, Belle & Sebastian was a fey indie band from Glasgow. It still is – except today, as prime mover Stuart Murdoch admits, it has a global cult following, from Hollywood to South Korea