Italian Government Falls

ROME -- Italy's government led by Prime Minister Romano Prodi, abandoned by its erstwhile Marxist allies over a belt-tightening budget for 1998, resigned Thursday after 17 months in office but is to stay on as a caretaker.

President Oscar Luigi Scalfaro accepted Prodi's offer to resign "with reserve," a traditional form of words used to ask the government to remain in a caretaker capacity.

Prodi, who headed Italy's first administration led by the left since World War Two, pre-empted certain defeat for his government in a scheduled vote in the lower house Chamber of Deputies by offering to quit.

Prodi's 17-month-old government depended on the far-left Communist Refoundation party in the lower house to pass legislation. But the communists refused to back the deficit-cutting 1998 budget because of cuts of 5 trillion lire ($2.9 billion) in pensions and welfare spending.

"Following the motion of Communist Refoundation which seals the crisis of the political majority ... I will go to the head of state to tender my resignation," Prodi told the chamber.

Scalfaro called on Prodi to stay on as caretaker until a new government was formed. The president was reported to be opposed to early elections 3 1/2 years ahead of schedule as it would probably scupper institutional and constitutional reforms due to be presented to both houses of parliament by the year's end.

A statement from the presidential office said Prodi resigned his government "after he acknowledged in the debate in the Chamber of Deputies that it could no longer command a majority."

After consulting with former heads of state, parliamentary speakers and political party leaders, Scalfaro will decide who he will ask to try to form a new government.

Minutes after Prodi left the chamber, opposition leader Silvio Berlusconi said Italy needed a cross-party coalition government to ensure the country's swift membership of European economic and monetary union, or EMU.

"The only serious solution is for a grand coalition. It is the most certain way to enter for sure in Europe, for overhauling the economy and for reforms," Berlusconi said.

In Brussels, European Commission President Jacques Santer said he hoped the resignation of Italy's government would not affect the country's preparations for EMU.

"I also express the hope for Italy, as for us all, that this crisis will not affect the remarkable effort at cleaning up [public finances] made by Mr. Prodi's government and preparations for Italy's participation in the single currency," he added.

A foreign affairs expert in German Chancellor Helmut Kohl's Christian Democrats said Prodi's offer to resign was a setback for the further development of the European Union.

But Spanish Economy Secretary Cristobal Montoro said Madrid was confident Italy could resolve its political crisis and would enter EMU at its launch date in 1999.

Despite the resignation, Italian treasury under-secretary Giorgio Macciota said the crisis did not compromise Italy's entry into EMU.

Stocks and bonds fell, but closed above the day's lows as they clung to hopes that the crisis would be resolved without resorting to a worst-case scenario of early elections.

The all-share Mibtel Index fell 2.8 percent to 15,075, after having dipped as low as 14,901 earlier. Italian December government bond futures fell 1.08 to 111.45. They had fallen as low as 110.90.

"The market remains outrageously optimistic," said Lorenzo Stanca, head of fixed-income research at Credito Italiano in Milan. "We don't think it will be such an easy job to find an alternative to the Prodi government."

Despite communist assertions to the contrary, Prodi had gone some way to meeting their demands to protect pensions and health care, and do more to boost jobs.

But like the crowds of ancient Rome who could save or take a life with the movement of a hand, the communists gave the thumbs-down to Prodi's fresh offer of compromise, sealing the fate of the government.

"As regards the budget, we consider it iniquitous. ... We are voting 'No' and doing it neither willingly or with light heart. You have forced us to do it," communist parliamentary leader Oliviero Diliberto told the chamber before Prodi announced his resignation.