Italy’s Renzi: Battle looms for ‘star’ Prime Minister

When Matteo Renzi took charge as Italy's third prime minister in as many years last year, his honeymoon was always likely to be brief.

Wednesday may be the most important day so far for his legacy, as he faces a vote of confidence in his cabinet, as well as hosting a jobs summit with other European leaders in Milan.

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Job creation is extremely important to Italy, where not only is unemployment over 12 percent – but even more concerning, close to half of Italian youth are unemployed.

Renzi has pledged to reform Italian labor legislation, which makes Italian workers notoriously difficult to fire. Yet he is facing opposition to his proposed reforms, much of it from within his own left-leaning Democratic Party (PD).

Together with "single" open-ended contracts which should make it easier to hire and fire, Renzi's proposed reforms also include the extension of unemployment benefits.

The labor market is a key problem for Italy and reducing guarantees for life-long employment is key to this reform," Francesco Castelli, chief investment officer at Method Investments, told CNBC.

He thinks Renzi has about a 50 percent chance of getting the reforms through – and warned the next Italian government could be installed by the IMF, if the country is forced to seek a bailout for its debt problems. While household debt levels in Italy are relatively low, its public debt ratio is higher than any other country in the euro zone except already bailed-out Greece.

"If he doesn't pass it quickly, the situation in Italy will get much worse. The situation is very dramatic," Castelli warned.

A key forward indicator of economic health, euro zone PMI figures, released last week, suggested that Italy, along with France, remains the weak spot of the euro zone. The IMF expects Italy's economy, as measured by gross domestic product, to shrink by 0.2 percent this year.

The vote of confidence is likely to be passed, if only because even sceptics within the Renzi-led coalition don't want yet another government to fail.

Yet the undermining of Renzi is likely to continue.

"Renzi formed a cabinet in order to be the only star. He has people with good will, but no experience, except for the economy minister (Pier Padoan)," Lucio Malan, a senator from the opposition Forza Italia-PdL party and prominent supporter of former Prime Minister Silvio Berlusconi, told CNBC.

- By CNBC's Catherine Boyle.