As European leaders gathered in Brussels overnight in yet another attempt to stem the region’s worsening debt crisis, attention was focused on the key role that two Italians are now playing.

The first is Silvio Berlusconi, Italy’s embattled Prime Minister. European leaders are deeply worried that the debt crisis will spread to Italy, which has a staggering €1.9 trillion ($US2.6 trillion) mountain of debt. There are fears the country may struggle to roll over more than €250 billion of debt that comes due next year unless it can convince markets it is serious about implementing urgent reforms to boost growth and cut debts.

On the weekend, Berlusconi received a stern lecture from French President Nicolas Sarkozy and German Chancellor Angela Merkel and was told to turn up on Wednesday with a detailed austerity plan, complete with a timetable for implementing the new measures.

Berlusconi, who has spent the past couple of days in a tussle with his junior coalition partner, the eurosceptic Northern League, arrived at last night’s summit with a 14-page letter that pledged Italy would meet its earlier commitment to eliminate its budget deficit and start reducing its debt burden by 2013. The letter also pledges to cut the size of the public service, to raise €15 billion over the next three years by selling off state-owned assets and to lift the country’s retirement age to 67 years by 2026.

But even if Berlusconi has done enough to placate Merkel and Sarkozy, he still faces the onerous task of getting his reform package through the Italian parliament. In Rome, there is now intense speculation that Berlusconi, who has survived a series of scandals, legal battles and dozens of censure motions in the Italian parliament, could finally become a casualty of the eurozone debt crisis. The Italian media is reporting that Berlusconi has decided to resign later this year or early next year, and to schedule fresh elections for next March, a year ahead of schedule.

But Italy’s situation is further complicated by the fact that another Italian, Mario Draghi, is about to take over as the head of the European Central Bank at the beginning of November. The ECB started buying the bonds of debt-laden eurozone countries in 2010 in an attempt to stop their borrowing costs from soaring. As a result, it now holds €169.5 billion of Greek, Spanish, Italian, Portuguese and Irish bonds. The ECB has been buying Italian bonds since August, but the outgoing ECB boss Jean-Claude Trichet has insisted that this was a temporary measure.

In fact, the ECB had been hoping that it could stop buying bonds this month, and that eurozone’s more powerful €440 billion bailout fund would take over the task. But it will be several more weeks before the fund is up and running, and many believe that the bailout fund still lacks the firepower needed to deal with the eurozone debt crisis.

As a result, Paris is urging the ECB to continue buying the bonds of troubled eurozone countries to stop the crisis from spreading. According to French newspaper Le Monde, last week in Frankfurt, Sarkozy asked Trichet to pledge that the ECB would keep buying bonds, but the outgoing ECB chief refused to make a commitment. Sarkozy has met with Draghi in recent days to argue the French position.

However, the French are worried that, faced with strong opposition from Germany, Draghi might be reluctant to continue buying Italian bonds for fear of being accused of showing “favouritism” to the Italians. The German representative on the ECB board, Jens Weidmann, has made little secret of his opposition to ECB bond buying, while earlier this week Merkel warned against creating the “false impression” that the ECB should bow to political considerations.

Overnight, Draghi told a conference in Rome that the ECB would use “non-conventional measures” to stem turmoil in financial markets, a comment that some interpreted as indicating that he favoured a policy of occasional ECB bond buying. Meanwhile, the confusion over the ECB’s future strategy, combined with the precariousness of Italy’s political situation, is making the atmosphere in Brussels even more feverish.

*This article was originally published at Business Spectator

Peter Fray

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