Mr Berlusconi has won his battle with Europe - but he remains in trouble at home

The Italian Prime Minister, Silvio Berlusconi, went to Brussels yesterday in the manner of a half-sorry schoolboy whose dog has eaten his homework. He had the task of explaining to European Union finance ministers why Italy was about to join the other delinquents that have breached the European Union stability pact. Then, and this was the harder part, he set out what he planned to do about it.

The Italian Prime Minister, Silvio Berlusconi, went to Brussels yesterday in the manner of a half-sorry schoolboy whose dog has eaten his homework. He had the task of explaining to European Union finance ministers why Italy was about to join the other delinquents that have breached the European Union stability pact. Then, and this was the harder part, he set out what he planned to do about it.

Mr Berlusconi's singular combination of showmanship and business acumen saw him through. He presented an austerity package of modest proportions, designed to shave just enough off public spending (about €7bn) to keep Italy's deficit within acceptable proportions. His plan was accepted, his plea for leniency, too, and his government was let off without even the threatened warning. Mr Berlusconi then let it be known that he intended to hold on to Italy's finance portfolio for a few months longer and so would not be appointing a successor to the economy minister, Giulio Tremonti, who resigned in dramatic circumstances at the weekend.

The reception accorded to Mr Berlusconi in Brussels was eloquent testimony to the shortcomings of the stability pact. Chief among them is the way in which so many countries have been able to flout it with impunity. There was little surprise, for instance, that Italy escaped even a warning. Other finance ministers had already made clear their view that it would be wrong to treat Italy worse than other countries. And with half of all EU members already, or about to be, in breach of the rules on fiscal discipline, Italy could hardly be singled out for punitive treatment. Italy also had useful chips to cash in after taking the sensible precaution of supporting Germany and France in their efforts to avoid punishment for their breaches of the stability pact last year.

None of this augurs well for the stability pact. Its members, having voted for a strict 3 per cent cap on national budget deficits to keep everyone in line and foster confidence in the euro, have been all too ready to engage in special pleading when it comes to their own economies and their own electoral prospects. The impression has also been created that there is one rule for the big countries and another for the small, fuelling resentment among those who have kept to the rules.

Yet even these deficiencies need not be fatal. After a period of weakness, the euro has strengthened against the dollar and is well on the way to becoming another reserve currency. It is credible. And while Germany and France have set a bad example by exceeding the deficit limit, in neither case has this been by very much. Moreover, as Mr Berlusconi's trip to Brussels showed, rule-breakers have to explain themselves and make efforts to comply. The stability pact is thus exerting a significant restraining effect. All this must be considered during the review of the pact next year, when it is likely to be made more flexible.

The prognosis for the Italian government, on the other hand, may be less hopeful. Until recently, many critics of Mr Berlusconi in Italy and abroad turned a blind eye to his past business practices and his growing stranglehold on the media because of his apparent successes. He has held the governing coalition together for a record three years and given an impression of economic competence.

Now both these perceived assets are in question. Italy's voters dealt Mr Berlusconi's Forza Italia party a fierce rebuff at the European elections last month, in part because the economy seemed stagnant and promised tax cuts had not materialised. What is more, Mr Tremonti's departure was the price the Prime Minister had to pay in order to keep his increasingly rebellious coalition together.

Mr Berlusconi's dilemma is that the pressure from within his coalition is for tax cuts and more spending, while the pressure from Brussels is for the very opposite. Mr Berlusconi may have taken the only possible course by assuming the economy portfolio. As of this week, however, the future of the stability pact looks brighter than that of the Italian government.