Italian PM meets with Center-right to defuse growing rift

ROME (Reuters) – Italian Prime Minister Enrico Letta met with a top official from Silvio Berlusconi’s Center-Right party on Monday to try to defuse friction that has rattled financial markets and could bring down Letta’s fragile coalition.

Relations between Berlusconi’s People of Freedom (PDL) party and Letta’s Democratic Party (PD) are increasingly tense ahead of a vote on whether to expel the media mogul from parliament over his tax fraud conviction, and because of disagreements over a property tax.

The spat between the unwilling coalition partners has reignited fears of fresh political instability in the euro zone’s third-largest economy as it struggles to emerge from a two-year recession, sending shares and bonds lower.

A top PD official on Monday accused the PDL of “blackmail” after several of its members threatened to bring down the government if the PD voted to expel Berlusconi from the Senate in a ballot due by October.

“The PD rejects any blackmail or ultimatum from the PDL,” party secretary Guglielmo Epifani told the daily La Repubblica on Monday, reaffirming that his party would vote in favor of Berlusconi’s removal.

“Berlusconi needs to take note of what led to his conviction, and he has to explain why he would bring down the government at a time of crisis,” Epifani told the paper.

He warned that if the government collapsed just as Italy was showing the first signs of recovery after its longest postwar recession, there would be “enormous costs” for society and renewed tremors in financial markets.

The parties are also divided over economic reforms and tax issues, notably a widely hated housing tax the PDL says must be scrapped despite fears that this could blow a hole in the country’s fragile public finances.

Letta, appointed to lead the cross-party coalition after inconclusive elections in February, is trying to push on with measures to spur growth and fight record levels of unemployment.

Berlusconi has been holed up in his luxury villa near Milan since early August when Italy’s supreme court handed him a four-year jail sentence, commuted to one year, for massive tax fraud at his Mediaset empire.

He is desperately trying to find a way to stay in the political game despite the sentence, which he is expected to start serving either under house arrest or by doing social work, in mid-October.