Brinkmanship by Italy over tax deal infuriates EU allies

Italy blocked a long-awaited European Union deal on the taxation of savings yesterday, infuriating its allies. The move also increased anxiety about Rome's assumption of the EU presidency in seven weeks.

At talks in Brussels, Giulio Tremonti, Italy's Finance Minister, refused to rubber-stamp an agreement on EU-wide rules on taxing savings interest, because of an unrelated dispute over Italy's milk quotas. Rome's obduracy provoked claims that Italy was blackmailing other EU member states by putting at risk the tax deal, which took about a decade to negotiate.

The dispute came as worries mounted over the ability of the Italian government, led by the Prime Minister, Silvio Berlusconi, to work effectively with the European Commission during its presidency. When Mr Berlusconi appeared in court this month to answer corruption charges he criticised Romano Prodi, the commission president, who is a former Italian prime minister and a political rival.

The Italian presidency, which runs from July to December, comes at a crucial time for the EU, which is trying to draw up a constitution and revamp its procedures to prepare for the expansion next year in which 10 countries will join. Valéry Giscard d'Estaing, the former French president, is chairing a convention which is drawing up a draft constitution due to be ready by the summer.

Mr Berlusconi wants agreement on the new constitution by December so a new Treaty of Rome can be proclaimed during his presidency. Diplomats remain sceptical that such a timetable will be achieved.

Yesterday's display of brinkmanship won few friends in Brussels. One diplomat described the confrontation with Mr Tremonti as a "bust up" adding that, at one point, Mr Tremonti "had to leave the [the meeting] for a breather".

Thor Pedersen, Denmark's Finance Minister, argued that he and his colleagues should not "talk about milk", adding: "It's for our colleagues in agriculture." Gordon Brown, the Chancellor, absented himself from part of the meeting dealing with the milk quotas in an apparent expression of his disdain for the Italian position.

At stake is a complex deal designed to ensure that EU residents cannot avoid being taxed on interest on their savings by opening accounts in other European countries.

Italy argues that it was set unreasonably low milk quotas, forcing it to import about 40 per cent of its milk. It asked to be let off fines, accumulated over many years, of about €650m (£465m) levied against farmers for exceeding milk production targets. Rome then suggested it could pay the fine and collect the money from farmers over 30 years with no interest payments.

An EU diplomat said: "It was very clear that what was being looked at was not acceptable to all delegations except the Italians and the presidency." Compromise from Rome is unlikely before regional elections on 25 May and 8 June. But EU ambassadors will try to resolve the issue. Mr Tremonti hinted that a deal could be reached next month.

The dispute is the latest example of Rome's desire to cut a more aggressive figure and bury its image of a nation that does not always fight hard for its interests. One diplomat argued that fears over Italy's ability to manage its presidency were exaggerated. "I've seen many presidencies and almost as many predictions of imminent chaos which failed to materialise," he said.