ITALIAN MINISTERS' RESIGNATION SPARKS GOVERNMENT CRISIS!

ROME—All five center-right ministers of former premier Silvio Berlusconi's party resigned Saturday from the coalition led by Prime Minister Enrico Letta, throwing the government into chaos as the euro zone's third-largest economy struggles to exit its worst recession in decades.

WSJ has it that the move by Mr. Berlusconi to pull support for the Letta government marks the culmination of a week of fast-rising tensions between the media mogul's People of Freedom Party and Mr. Letta's left-leaning Democratic Party. It leaves Italian President Giorgio Napolitano with the difficult choice between forcing the formation of a new government and sending Italians back to the polls just seven months after inconclusive elections produced a hung parliament.

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European Pressphoto Agency

Italian Prime Minister Enrico Letta leaving Chigi Palace in Rome on Saturday.

The conservative ministers' surprise move accelerates the timing of a political showdown sparked by a threat of mass resignations earlier this week by Mr. Berlusconi's lawmakers, in protest of the possible impeachment of the former premier due to his recent tax-fraud conviction. Mr. Letta responded Friday by demanding a full show of support in parliament, adding that he was unwilling to carry on without clear backing.

The government crisis threatens to thwart the recovery of the Italian economy, which is badly in need of deep reforms to pull it out of a two-year recession. While Mr. Letta passed some modest measures, his five-month government was largely paralyzed by infighting.

The acrimony between Mr. Berlusconi's conservative forces and the Democratic Party burst into full view Saturday. Mr. Berlusconi's party said the government's failure on Friday to avert a sales-tax increase scheduled to kick in next week left it little choice but to pull the plug on the coalition. Mr. Letta's cabinet has now lost nearly half of its 13 members. As a consequence, the Italian premier will have to meet Mr. Napolitano, possibly as soon as Sunday, to tell him he now lacks full support for his government. He may agree with the Italian president to submit to a confidence vote in parliament, which will decide the fate of his mandate.But Mr. Letta immediately shot back in a sharply worded statement. "In order to justify his crazy and irresponsible move, aimed exclusively at covering his personal problems, Mr. Berlusconi is trying to invert responsibilities, using the sales tax as an alibi," he said, adding that his decision to freeze efforts to put off the sales-tax increase was due to the threat of mass resignations by Mr. Berlusconi's forces.

While Mr. Letta's Democratic Party has a clear majority in the lower house, he relies on Mr. Berlusconi for a majority in the upper house. If he loses a confidence vote, Mr. Napolitano is left with the choice of dissolving the chambers, calling new elections, or trying to broker the creation of a new government, possibly with the limited task of reforming the widely criticized electoral law.

That law, dubbed "porkster law," is blamed for the political impasse and hung parliament that emerged from inconclusive elections last February. After two months of unsuccessful talks, Mr. Napolitano forced an awkward alliance between the People of Freedom Party and the Democratic Party.

But the two parties crossed swords since the start, bickering incessantly over key economic measures, including a much-hated property tax--whose first installment was eventually scrapped this summer--and the upcoming sales-tax increase. Mr. Berlusconi's party, which relies on support from small businesses, such as mom-and-pop shops that would be hurt by the tax increase, vehemently opposed the increase.

Tensions soared further in August, when Italy's Supreme Court issued a definitive conviction of Mr. Berlusconi for tax fraud. Since then, his hardline supporters have stridently called for the media mogul to bring the government down, although Mr. Berlusconi has nominally continued to support Mr. Letta. However, the conviction led to parliamentary proceedings that could strip Mr. Berlusconi of his Senate seat. The threat by his supporters to resign this week was in protest of the impeachment process.

Mr. Napolitano is fervently opposed to new elections, frequently rebuking politicians for incessant quarreling that has largely paralyzed the Letta government at a critical moment for Italy. Moreover, with popular resentment of Italy's political class running high, the outcome of new elections is highly unpredictable and could produce another hung parliament. As a result, some analysts expect him to form a new government. A new coalition would be the fourth in three years.

Borrowing rates for Italian government debt have edged up somewhat in recent weeks as the government grew increasingly weak, but they are far from the dangerous levels reached during the political crisis of 2011. The muted reaction by markets is attributed to guarantees of stability by the European Central Bank.

The crisis comes at a critical moment for Mr. Letta's government, which was meant to agree Friday on about €3 billion ($4 billion) in budget cuts aimed at meeting a pledge to the European Union to keep its deficit under 3% of gross domestic product. At that meeting, the government planned to find a way to cover the budget shortfall that would have come from canceling the increase in the sale tax, which kicks in Oct. 1.

The IMF said Friday that political instability may endanger the modest recovery seen at the end of this year, and stressed that the country will be mired in a slow growth for the foreseeable future unless it makes additional reforms to its tax system and labor market. WSJ reports.