Analysis: Risk of Italian crisis recedes but respite may be brief

By Barry Moody ROME (Reuters) - Silvio Berlusconi has pulled back from toppling the Italian government but the respite may be brief, and the fragile coalition remains too divided to pass reforms that the economy urgently needs. The 76-year-old former prime minister did not follow through on threats to bring down the left-right government when he spoke on Wednesday about his conviction for tax fraud and sentencing to up to a year of house arrest or community service. But the tone of the media tycoon's long-awaited video address seems to leave the coalition partners closer to an armed truce than any fruitful peace. Berlusconi attacked the left, lambasted judges who convicted him and re-launched his original political party, Forza Italia (Go Italy) in what looked like the start of an electoral campaign, despite assurances by his aides that his ministers will not abandon the government. "Now begins a season of guerrilla warfare ... daily hand-to-hand fighting with the intention of blaming the other for a crisis which at a certain point will come," said Marcello Sorgi a commentator for La Stampa daily. "Meanwhile, the government is condemned to drift along in a state of semi paralysis." Even if the coalition hangs together despite severe tensions - and some analysts predict an election by March next year - decisive action to tackle one of the world's highest debts and Italy's worst postwar recession seems remote. With an economy forecast by the Bank of Italy to shrink 1.8 percent this year, Prime Minister Enrico Letta has little chance of cutting a public debt amounting to more than 130 percent of gross domestic product. The major partners in the government, Berlusconi's center-right People of Freedom (PDL) - which he is replacing with Forza Italia - and Letta's center-left Democratic Party (PD) are already at loggerheads in their usual battleground over taxes. PDL lower house floor leader Renato Brunetta said the government would fall if it went ahead with raising value-added tax by one percentage point next month. But PD deputy economy minister Stefano Fassina said VAT could be kept down only with the necessary financial cover, saying 5 billion euros ($6.7 billion) was needed to meet the government's 2013 commitments. He suggested modifying the abolition of a hated housing levy so that the richest 10 percent of Italians would still pay it, a red rag to the PDL which insisted on repealing the tax. EXASPERATED LETTA Letta, exasperated at political games that sap his ability to act, said on Thursday: "For some time there has been a desire to use the government as a sort of punching ball." He rejected Berlusconi's attack on what the billionaire calls political judges. Party doves and business allies persuaded Berlusconi to drop threats to bring down the government over votes next month to expel him from parliament because of his fraud conviction. Berlusconi now seems resigned to expulsion although he vowed to stay in politics and seems intent on engineering a crisis that he can blame on the PD, itself riven by factional fighting. Italians suffering from the recession are likely to punish whoever causes an election, a major factor in Berlusconi's decision to stick with the government for now. But Letta's ability to make structural reforms to stimulate economic growth and cut 2 trillion euros of debt are limited while the PD and PDL are so divided. "I see no decisive moves. I just see small steps to survive but not really to change, not really to transform and this is very bad," politics Professor Gianfranco Pasquino of Bologna University told Reuters. Unlike some other analysts, Pasquino thinks Letta will continue until after the end of Italy's six-month presidency of the European Union in December 2014, not least because President Giorgio Napolitano strongly opposes new elections. "But no decisive change is in the making," he said. This will slow Italy's stuttering recovery from recession, in which it is already behind many of its European peers, and its ability to cut the huge public debt. (Editing By David Stamp)