Ciao! Berlusconi stands down

Italy's premier finally makes his exit, leaving technocrat Mario Monti to tackle the financial crisis

Silvio Berlusconi, Christine Lagarde and Mario Monti

Silvio Berlusconi, who, for all his monkey business, was the lawfully elected prime minister of Italy, finally resigned last night. He is the most high-profile head to be placed on the spikes of the present eurozone crisis, and is almost certain to be replaced by a former European commissioner who was appointed a lifetime senator a few days ago.

The promised, although limited, austerity reforms passed through their final stage in the Italian parliament yesterday and Mr Berlusconi, for once, was as good as his word, immediately quitting the political scene he had dominated for 17 years.

He formally relinquished power at the presidential palace, where a large crowd had gathered and been entertained while they waited by a group of singers and classical musicians performing Handel's Hallelujah Chorus. As Berlusconi's motorcade entered and exited the palace, hecklers shouted "Buffoon, Buffoon!", and the crowd grew so unruly that the ex-prime minister was forced to leave secretly via a side entrance. For Italian liberals, a festive night followed.

The world now waits to see tomorrow if the departure of Italy's longest-serving post-war prime minister will be enough to appease the gods of the bond market – who, rather than Europe's leaders, seem to be the ones deciding the fate of severely indebted nations.

There are grounds for optimism. On Friday, the yield on benchmark Italian 10-year bonds fell to 6.48 per cent, safely below the crisis level of 7 per cent reached earlier in the week. Greece, Ireland and Portugal all required international bailouts after their own borrowing rates passed 7 per cent. The Italian economy would not be so easy to save. It totals €1.9trn (£1.6trn) – twice as much as the other three countries combined.

Like the villain of an opera who, after being stabbed, takes an interminable time to stop singing and lie still upon the stage, Mr Berlusconi's end has been a drawn-out affair. Admitting last Tuesday that his political wounds were now mortal, and clutching his chest crying "traitors!" at those in his own party who deserted him, Mr Berlusconi took five days to expire. And there was always the fear that, even as he hammed up his death scene, he would find a way of rallying for yet another encore.

In the end, all it took was a vote, a final cabinet meeting and a tendering of his resignation at the palace of President Giorgio Napolitano. The vote was by the Chamber of Deputies approving economic reforms, which include increasing the retirement age (starting in 2026), but doing nothing to open up Italy's inflexible labour market. The cabinet meeting was a brief affair, at 6pm Rome time, and then it was a short car ride to the palace.

While the respected former European commissioner Mario Monti remained the top choice as the head of a transitional government, Mr Berlusconi's allies remained split over who should replace the embattled leader. It wasn't believed that their opposition would be sufficient, however, to scuttle President Napolitano's plans to ask Mr Monti to form an interim government once Mr Berlusconi had resigned.

The eurozone's other intensive-care case, Greece, continues to construct some sort of political momentum that can see through what the supra-national chiefs are demanding. Its new cabinet may last a month or two longer than planned, a senior government official said yesterday, but also added that, whatever happens, Greeks should not expect any relief from the tough austerity measures they have endured for two years. A national unity government, led by technocrat Prime Minister Lucas Papademos, took power on Friday with the task of tackling Athens' huge debt load and meeting the terms of a €130bn bailout agreed with rescue lenders last month.

In his first statement as Prime Minister, Mr Papademos vowed to fulfil a deal forged last month with eurozone leaders that will release an €8bn loan which Athens needs to avoid running out of cash next month, plus longer-term funding later. A source from the so-called "troika"– the European Union, the International Monetary Fund (IMF) and the European Central Bank – said inspectors would visit Athens early this week to speak to the new government and would clear the next tranche only when it pledged to meet its commitments.

Italy, meanwhile, is under intense pressure to put in place a government that can push through even more painful reforms and austerity measures to deal with its staggering debts, which take up a huge 120 per cent of economic output. Italy has to roll over a little more than €300bn of its debts next year alone. Markets battered Italy last week amid uncertainty that Mr Berlusconi would really leave and questions over whether Italy's notoriously paralysed parliament could rally around a replacement. But Italy's borrowing rates pulled back after Mr Napolitano made it clear he intended to ask the politically neutral economist Mr Monti to head an interim government to push the reforms through.

The head of the IMF, Christine Lagarde, said Italy's political transition over the next few days should send a "clear sign of clarification and of credibility" that the country is on the right path to get its finances back in order. The IMF has a key role to play over the next few months in monitoring how Italy implements reforms to rein in debt and spur growth, which is projected at a scant 0.6 per cent this year and 0.3 per cent next year.

Amid market turmoil last week, Mr Berlusconi was forced to ask for IMF monitoring of Italy's finances, a humiliating prospect for the eurozone's third-largest economy and an embarrassment for the long-defiant former prime minister. Speaking to reporters in Tokyo yesterday, Ms Lagarde had high praise for Mr Monti, saying she had great esteem for the "quality" economist with whom she had long enjoyed an "extremely warm" and effective relationship. The technocrats are now even more in charge of the asylum that is eurozone finances.

Back in Britain, ministers say they are nervous about the impact of the crisis on British growth, and hope George Osborne's autumn statement later this month will provide the catalyst needed to get the economy moving. This week the Government faces a fresh rebellion in a Commons vote on easing fuel duty, as Tory and Lib Dem MPs fear the impact of the economic crisis on their constituents' pockets. However, in a speech yesterday, Ed Miliband, the Labour leader, accused the Government of failing to take responsibility "for what is happening in the British economy". He added: "When people's jobs, homes and businesses are in jeopardy it is not enough for the Prime Minister and the Chancellor to use the eurozone crisis as a cloak to hide their lack of action. They made a fundamental mistake in choking off our economy a year ago."

David Cameron will meet Angela Merkel, the German Chancellor, in Berlin on Friday to discuss the European Council talks in December.

Outside the zone: Osborne and the secret non-euro dining club

EU finance ministers from outside the eurozone have formed a secret dining club, which met on the eve of crunch talks in Brussels last week, to avoid being railroaded by the 17 countries struggling to rescue their single currency.

George Osborne, the Chancellor of the Exchequer, joined the other nine non-euro countries on Monday evening for an informal dinner organised by Czech Finance Minister Miroslav Kalousek at the Sofitel Hotel.

Treasury sources stress Mr Osborne has been at pains to take part in all talks, believing that engaging with the major institutions is in Britain's interests.

Poland is pushing for non-euro countries to be involved in all eurozone meetings. The "euro-out" dining club is being seen as an antidote to the Groupe de Francfort, which includes France and Germany, EC President José Manuel Barroso, and the head of the IMF, Christine Lagarde.

"This is not about 10 ganging up on the other 17," a Treasury source said. "These things slice up different ways. When there is any suggestion of clobbering financial services, it is London against the other 26. We have engaged a lot more and achieved a lot more as a result."

Matt Chorley