MercoPress. South Atlantic News Agency

Euro zone bailout summit outcome in doubt; Italian government on the brink

Berlusconi has been unable to convince his coalition on austerity measures

Italy's cabinet failed on Tuesday to agree on pension reforms as the country seeks to re-launch its economy and tackle its debt. Meanwhile, financial markets nervously await the outcome of Wednesday's second Euro zone summit.

Despite some tentative support from the center-left opposition in a meeting late Monday between Italian Prime Minister Silvio Berlusconi and his ministers, Italy's cabinet has failed to agree on a set of proposed pension reforms requested by the European Union.

Following the meeting, Berlusconi hosted a working dinner with Economy Minister Giulio Tremonti and three other ministers representing the government's junior partner, the Northern League, which opposes plans to raise the retirement age and has threatened to pull out of the government over the issue.

If Italy fails, all the EU bailout plans can be forgotten, according to Daniel Gros, director of the Centre for European Policy Studies in Brussels.

“Italy will decide the future of the euro,” said Gros. “It is the be-all and end-all.”

German Chancellor Angela Merkel and French President Nicolas Sarkozy made every effort to paint a picture of harmony as Sunday's crucial EU summit drew to a close. On the agenda were a Greek debt cut, a bank rescue package and the expansion of the Euro zone's emergency bailout fund, the European Financial Stability Facility (EFSF), all of which remained largely unresolved.

Nevertheless Merkel and Sarkozy were united, emphasizing their desire to work together to find a lasting solution to the debt crisis.

It was in this vein that Merkel and Sarkozy gave a joint press conference on Sunday evening. The French president said the participants had largely agreed to expand the EFSF. The technical details of this agreement, which is to go a vote in the German parliament, are still to be formulated.

Merkel also blocked suggestions that the European Central Bank (ECB) should contribute to an increased bailout. As a result it seems the ECB's printing press will remain off limits for the EFSF.

Economic experts are currently working out two alternative solutions that rely on partial guarantees for investors who purchase government bonds from troubled Euro zone nations.

Uncertainty also surrounds the potential impact of increasing equity for European banks. The Euro zone heads agreed on this measure, in principle, to ensure that the banks can cope with likely losses in Greece and other indebted countries.

The details are still unclear and can only be finally decided on in conjunction with a third issue - the debt haircut of 50 to 60% for Greece.

According to Merkel, the second EU summit on Wednesday is unlikely to be the last on this issue. She says the future shape of the monetary union is still to be discussed and control mechanisms must be strengthened.

“There are therefore many steps left to take,” said Merkel. “But during the upcoming discussion on Wednesday we must take very clear steps which complement each other.”