Italy's Letta to juggle demands of EU and parties

Gildas Le Roux

Italy's new coalition government has been cheered by many at home and cautiously welcomed abroad, but faces challenges to its survival, from managing rivalry between the newly united right and left to funding growth-boosting measures.

Summing up the widespread hope that Prime Minister Enrico Letta holds the keys to ending Italy's crisis, Ugo Magri wrote in La Stampa daily that the young and diplomatic premier had received "unanimously favourable" initial reactions.

He is "a point of convergence for vast sectors of the political class and society", Magri said.

While not everyone approves of the deals done to bring the centre-left and right together to break months of political deadlock -- the anti-establishment Five Star Movement is in fierce opposition -- Magri's comments captured the general sense of optimism about Letta's prospects.

However, just two days after being sworn in, the 46-year-old leftist moderate attempted to dampen down the enthusiasm, warning Tuesday that the country had "excessive expectations".

"Reading the newspapers this morning I realised we have a big problem; there are excessive expectations compared to the fragility of the situation," he said.

The eurozone's third-largest economy is in debt to the tune of some two trillion euros ($2.6 trillion) and fears linger that it could slip back into the eurozone debt crisis.

On Monday, Letta announced he would act fast to tackle the social fallout from an austerity policy imposed by his predecessor Mario Monti, but details on specific measures to be taken were thin.

One thing he did promise was to suspend a controversial housing tax starting in June. The vow left many wondering how Letta would plug the gap, and if he would sooner or later be forced to back-peddle.

The premier, one of the youngest in Europe, has little wriggle room.

Former prime minister Silvio Berlusconi, whose protege Angelo Alfano is now deputy prime minister, said his centre-right People of Freedom party "will not support the government" if it does not keep its word on the tax.

Billionaire Berlusconi had made abolishing it one of his electoral promises, and Letta can ill afford to alienate the media magnate, who could pull his support and bring the new government down.

Letta has also promised to respect commitments made to the European Union, though his plan is to persuade his European partners to allow him a "margin for manoeuvre" in reigning in Italy's debt.

The aim is to buy more time for the government to balance the budget, giving it room to find the billions of euros needed to finance his plans for better welfare, more jobs and growth.

The EU has been outwardly upbeat about Letta's chances, with Simon O'Connor, economic affairs spokesman, saying the commission had "full confidence in the determination of the new government to reach the objectives fixed for this year.

"They have said they are committed to respecting the European objectives within the stability pact," he said, adding however that it was too early to tell how Italy would do.

Expert Dino Pesole from Italy's business daily Il Sole (Milan: S24.MI - news) 24 Ore described Letta's road ahead as "a real obstacle course".

Economics professor Marco Menegatti from Parma University said that "a lot will depend on the government's ability to persuade the EU that it will respect its engagements, regardless of requests for more time."

The problem with trying to forecast the government's success in reversing the worst recession the country has seen in 20 years is that "Letta remained fairly vague in his speech, and much is mere hypothesis for now," he said.

"The real question on everyone's minds is: where is he going to get the money?"