Italy's participation in the start-up of European Monetary Union (EMU) was last night threatened by a crisis within the centre-left government of the Prime Minister, Mr Romano Prodi, following the refusal of the government's hard line left-wing ally, Rifondazione Communista, to vote for the 1998 budget.
Mr Prodi formally acknowledged that his coalition majority was in crisis yesterday morning, while later in the day the government's Minister for Relations with Parliament, Mr Giorgio Boggi, said that a lower-house debate would be convened as soon as possible in order to clarify relations between the government and Rifondazione.
That parliamentary showdown, due later this week, could mean the collapse of Mr Prodi's 17month-old government if the left-wing party continues to reject the budget. Mr Prodi yesterday reiterated his oft-stated unwillingness to lead any other possible coalition.
The collapse of the Prodi government would almost certainly exclude Italy from the start-up of the single currency, with Italy's European partners pointing to political instability and the failure to introduce structural reforms of the Italian economy.
Since coming to power in April last year, the Prodi government has depended on the support of Rifondazione's 34 deputies in the lower house. Although Rifondazione is not a member of government, it has exercised a defacto veto on all key government policy in the last 17 months, a veto based both on its lower-house votes and on the fact that its electoral pact with Mr Prodi's "Olive" coalition contributed much to the centre-left's general election victory.
Rifondazione is a splinter group of the former Italian Communist Party (PCI), made up of members who refused to follow the PCI down the road to social democracy. Tensions between the ex-communist Democratic Left (PDS), the largest party in the Prodi government, and Rifondazione clearly play a part in this current crisis.
In the short term, Rifondazione refuses to endorse a £10 billion deficit-cutting budget, part of which calls for £2 billion worth of welfare and pensions cuts. The Rifondazione leader, Mr Fausto Bertinotti, has not only rejected any cuts in social spending but has also urged the government to introduce a 35-hour working week.
He also wants the state holdings giant IRI to become a development agency for southern Italy and is opposed to foreign investment in state companies Telecom Italia and ENEL (Electricity Board), currently preparing for privatisation.
Government spokesmen yesterday suggested that there was little room for manoeuvre, pointing out that in response to Rifondazione's urgings, the welfare cuts had already been almost halved, while the budget contains a £1.6 billion package of employment and economic growth incentives.
Curiously, the crisis has caught the Italian political establishment by surprise. Few political rivals or commentators thought Rifondazione would push this far, with most believing that Mr Bertinotti's oft-voiced reservations about the budget were merely attempts to increase his leverage.