Prime Minister Silvio Berlusconi on Monday was in 11th-hour talks aimed at saving his conservative coalition as investors renewed pressure on the premier to step down and allow a new government to steer the country out of Europe's debt crisis.
Over his 18 years as the leading man of Italian politics, the 75-year-old Mr. Berlusconi has survived sex scandals and corruption trials. But on Tuesday, Italy's controversial leader faces what is likely to be the biggest test of his political career: a parliamentary vote that could strip him of his governing majority, triggering a chain of events that could lead to his ouster and usher in elections or a new government of national unity.
The prime minister on Monday denied reports that he was planning to resign and said he was convinced his government would survive. "We will persevere," the premier said in a telephone call broadcast to a political rally on Monday, after spending the day in his villa near Milan with key advisers and his two eldest children.
Mr. Berlusconi was due to meet on Tuesday with at least one lawmaker in his party who has threatened to defect, according to lawmakers. "I want to look my traitors in the face," Mr. Berlusconi was quoted as saying to Libero, a right-wing newspaper whose top editors are close to the premier.
If he does leave, Mr. Berlusconi would become the highest-profile political victim of Europe's debt crisis. World leaders have for months been urging Italy's premier to put in place measures aimed at breathing life into the country's economy and lowering Italy's huge debt of €1.9 trillion ($2.62 trillion). Its debt level of 120% of gross domestic product is second only to Greece's in the euro zone. The fear is that if Europe's third-largest economy loses market financing, a potential bailout would put an incalculable strain on the continent's currency union.
Yet so far Mr. Berlusconi has failed to deliver, infuriating his European peers and exacerbating tensions within his conservative coalition.
Two weeks ago, Mr. Berlusconi presented euro-zone leaders meeting in Brussels with a 17-page letter pledging a partial reform of the Italian pension system, speeding up of state-asset sales and loosening labor laws to make layoffs easier. But these measures still need parliamentary approval, and it's unclear how exactly the government is planning to put them in place.
"His time is done. Not because we say so, but because he has such low credibility with the international community," says a senior lawmaker in Mr. Berlusconi's party.
The premier's dwindling support in Parliament is expected to come to the fore on Tuesday during a vote in Parliament on routine budget matters. If Mr. Berlusconi isn't able to muster a majority, due to recent defections within his party, opposition lawmakers say they will present a no-confidence motion that could bring down the administration. That, in turn, could lead to the formation of a new emergency government or elections.
Italy's credibility has further been undermined by a decision—taken at last week's summit of Group of 20 industrial and developing nations in Cannes, France—to allow International Monetary Fund officials to visit Italy and monitor the government's efforts to implement promised measures.
In his time as premier, Mr. Berlusconi's penchant for late-night soirées with younger women has been a source of nonstop scrutiny in Italy. He is on trial in Milan on charges of paying a then-17-year-old club dancer for sex and abusing his powers to cover up the alleged relationship. Mr. Berlusconi has steadfastly denied the charges, rallying supporters to his side.
His failure as a steward of Italy's economy, however, has taken a much greater toll on his political base.
To Mr. Berlusconi's critics, the European crisis has unearthed a key shortcoming of the two-decade long Berlusconi era: his failure to improve Italy's economic fortunes. When he first came to power in 1994, Mr. Berlusconi—a highly successful businessman who had built a major media empire—promised economic well-being and political stability to an electorate tired of decades of short, revolving-door governments.
Italy's economy has barely grown over the past decade. The average annual disposable income in Italy fell by €360 a person in the period from 2000 to 2009—during which time Mr. Berlusconi was in power for seven years.
More recently, as the European crisis has unfolded, Mr. Berlusconi has been unable on the one hand to convince financial markets of the government's resolve to get Italy's economy back on track and on the other to sell his constituencies on the need for deep overhauls. Addressing Parliament in early August, he insisted Italy's economy and its banks were on solid footing, noting: "I have three companies quoted on the stock market. I, too, am in the financial trenches, and I understand what's going on in the markets."
Yet the measures that Mr. Berlusconi introduced in the wake of that address disappointed investors. Borrowing costs continued to soar, prompting the European Central Bank to step in.
Even if the government holds on, it is becoming increasingly clear that—with his parliamentary majority constantly in doubt and international criticism rising—Mr. Berlusconi no longer has the ability to make serious policy moves. That includes, crucially, taking the steps needed to remove Italy from the cross hairs of the escalating European debt crisis.
Whatever happens on Tuesday, Italy is inevitably staring at a phase of painful and unpopular belt-tightening measures—a period of austerity that could well drive people into the streets as they have in neighboring Greece and Spain.
Italy's labor unions already have vowed to block any attempt to loosen the country's labor laws or cut generous welfare entitlements.
"Not preparing the Italian citizen for the fact that certain sacrifices are necessary is very negative," Mario Monti, a former European Union commissioner who is tipped as the most likely prime minister of an emergency government, said at a recent conference in Rome.
Markets already are looking ahead to a post-Berlusconi government. Italian 10-year government bond yields hit a 14-year high of 6.67% in the morning, then eased as reports of a possible resignation by Mr. Berlusconi spread. "The financial markets are clearly saying today that it is better to have Berlusconi out of the picture," said Gianpaolo Rivano, a fund manager at Gesti-Re Srg SpA in Milan.
If the government were to lose its parliamentary majority, the ball would land in the court of Giorgio Napolitano, Italy's 86-year-old president. Mr. Napolitano wields the power to decide whether to form a national unity government charged with passing tough economic measures, or to call early elections.
The latter scenario, which Mr. Berlusconi favors, would plunge Italy into months of uncertainty as the country's political parties prepare to face voters.
Napolitano's role is crucial in a scenario in which there is a vacuum and lack of power," said Franco Pavoncello, a professor of politics at John Cabot University in Rome. If Mr. Napolitano forges a national unity government, lawmakers across the spectrum expect him to tap Mr. Monti, a respected economist. Lawmakers say Mr. Napolitano also could turn to former Prime Minister Giuliano Amato or Gianni Letta, Mr. Berlusconi's right-hand man, to lead a national unity government. Messrs. Monti, Amato and Letta didn't respond to requests for comment.
Mr. Monti's international stature would give Rome the instant shot of credibility it currently lacks under Mr. Berlusconi, helping to lure investors back to Italy's beleaguered debt market, according to analysts and lawmakers on all sides.
Mr. Monti served as a top EU official from 1995 to 2004, first as the bloc's financial regulator and then as competition commissioner, during which time he launched antitrust proceedings against Microsoft that led to the European Union ordering the U.S. company in 2004 to pay a fine of €497 million.
He also oversaw efforts by EU members to privatize state-owned companies—an experience that brought him into close contact with European Central Bank President Mario Draghi, who at the time was an Italian treasury figure charged with carrying out Italy's privatizations.
"Monti is an authoritative name. He has a certain credibility on the international stage," said one prominent lawmaker in Mr. Berlusconi's party. The lawmaker said he is ready to switch allegiances from the premier's government to a possible emergency one led by the former EU commissioner.
The lawmaker also noted that Mr. Monti enjoys rare bipartisan standing in Italy's fractious establishment. "He has an advantage; you can't link him to either side," he added.
Still, Mr. Monti or another nonpolitician who might be called upon to form an interim government would have a tough time navigating the political machinations of Italy's Parliament.
"Without wide support, Prime Minister Mario Monti would not have a long life in Parliament," said Giuliano Urbani, a former culture minister for Mr. Berlusconi and a founding member of his first political party, Forza Italia.
Even Mr. Monti concedes his political résumé is thin. When Mr. Monti arrived at the recent conference, held by an association of pension funds for physicians, he was greeted with strong applause and cheers of "Bravo, Bravo!"
Taking the stage, however, Mr. Monti quickly declared: "I'm not a politician."
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