Prodi's dilemma: let the left win or surrender Italy's drive towards Emu

Italy has fought long and hard to be among the first wave of countries admitted to the single European currency.

Until last week, it seemed to be all but assured of its goal. Then the government did what Italian governments always do sooner or later: it went into crisis. Andrew Gumbel looks ahead to crucial negotiations today.

This is a crisis that has been a long time a-coming. Ever since his centre-left Olive Tree coalition took office 17 months ago, Italy's Prime Minister Romano Prodi has been painfully aware of a chronic weakness on his left flank, namely the far-left party Rifondazione Comunista whose support he is forced to rely on to make up a governing majority in the Chamber of Deputies.

All through the agonising budget debates aimed at slashing the country's runaway deficit down to manageable Euro-proportions, Rifondazione has made clear it will only tolerate the pain of austerity as long as it does not interfere with pensions or key social spending on health and education.

Every now and again the party has pushed the government to the brink of collapse on other issues too, as this spring's tortuous approval of the multinational force sent to Albania illustrated.

Mr Prodi's team has, under the circumstances, done remarkably well to cut the deficit as far as it has, bringing Italy within a whisker of the 3 per cent deficit-to-GDP ratio laid down in the Maastricht treaty.

But next year's budget is different. Next year's budget can no longer rely on tax increases and creative accounting devices to satisfy the guardians of the Euro. It has to attack the welfare state so beloved of Rifondazione's mercurial leader, Fausto Bertinotti.

Since the summer holidays, Mr Prodi has been caving in to Mr Bertinotti's demands to go soft on pensioners and the sick. Originally, some 10 trillion lire was to have been shaved off the pensions budget; the final package presented last weekend reduced that to less than five trillion. Originally, there were to have been no further tax increases; the final package included a number of them to make up the pensions shortfall.

But all this was not enough for Mr Bertinotti, who has made a career of tripping everyone else up and pushing himself into the limelight. On Monday he gave a definitive thumbs-down to the budget, declaring that "only God can save this government now".

He may, of course, be exaggerating. This is Italy, land of political brinkmanship and limitless compromise, where even the worst of rifts have a habit of being miraculously cured at the 11th hour.

Unable himself to believe that Italy's European future is about to go down the tubes, Mr Prodi has convened a parliamentary debate for next Tuesday, thus giving himself a few days' grace to find a way out of the impasse.

There are many options, but the most likely ones are either getting Mr Bertinotti back on board, possibly by offering further concessions; or persuading at least a handful of opposition deputies to side with the government, even if this means the fall of the Prodi coalition as soon as the budget is passed.

Mr Prodi has ruled out broadening his coalition, since that would scupper Italy's long-suffering attempts at creating a bipolar political system. The main governing party, the PDS, has ruled out the possibility of trying to build a new government if Mr Prodi falls. The only option in that case, it says, is fresh general elections.

Today, Mr Bertinotti will meet with Mr Prodi, and the Prime Minister said he would make every effort to strike a deal. "I am against interrupting the course of this government and will do everything possible to prevent it from happening," he said in a speech on Saturday.

Deputy Prime Minister Walter Veltroni said the government was open to discussing a reduction in the working week, which Rifondazione wants reduced to 35 hours from a current 39, and other measures to boost employment. "This could then lead to other initiatives." he said.

But the Rifondazione leader was not optimistic in an interview yesterday. "Let's put it this way." he said. "We're inclined towards pessimism but we'll do all we can because tomorrow's meeting could prevent the fall of this government."

He told La Stampa that he would propose a one-year pact to nurse the government through the crucial spring of next year when Italy hopes to clinch its place in the first wave of entrants for Emu.