If Berlusconi Exits, What Next for Italy?

The strongest hint yet that Italian Prime Minister Silvio Berlusconi may finally cede his office came on Wednesday, with reports in the Italian press that he is planning to step down in January.

Italian Prime Minister Silvio Berlusconi
Vincenzo Pinto | AFP | Getty Images
Italian Prime Minister Silvio Berlusconi

With no official announcement from Rome ahead of the crucial European Union summit Wednesday afternoon, at which Berlusconi is expected to present a new reform package for Italy, analysts are urging caution over the reports.

There are also concerns about who would succeed Berlusconi and whether a replacement would push through the fiscal and structural reform many believe Italy needs.

For Berlusconi himself, exiting the premiership might make him more vulnerable elsewhere. He is currently fighting corruption allegations as well as accusations of alleged sex with an underaged prostitute.

"This is not a firm commitment to anything," Alistair Newton, managing director and senior political analyst at Nomura, told CNBC.com.

"There's nothing here to persuade the other leaders or the financial markets that you are going to see significant advances in fiscal reform."

Two of the key elements markets are looking for are changes to the age at which Italians can start drawing a pension from 65 to 67, which was finally agreed on last night, and a commitment to electoral reform.

Italian 10-year bond yields rose slightly to 5.955 following the announcement.

The FTSE MIB, the benchmark Borsa Italiana stock market index, rose slightly percent to 16,117.14 by Wednesday lunchtime in Europe.

Markets 'Lost Confidence'

"Markets have basically lost confidence in the Berlusconi administration and will want to see something much more definitive before they are reassured," Newton said.

"At least he has a strong enough parliamentary majority to push through structural reform. The left wing doesn't seem cohesive and the Northern League (Berlusconi's main coalition partner) is opposed to pension reforms."

There has been much criticism of Italy's current "party list" proportional representation electoral system, which was brought in under Berlusconi's government in 2005. Critics say it makes a hung parliament more likely.

If Berlusconi, who is Italy's longest-serving post-war prime minister as well as one of its richest men, resigns, head of state Giorgio Napolitano will have to try and form a new government. This could mean a general election.

However, if Berlusconi does not leave until January, an April election would be likely, according to Newton, which would leave Italy rudderless as the country struggles with a hefty debt pile. Elections are not currently due until spring 2013.

The other option is for Napolitano to try and form a government of technocrats, similar to the administration which ruled between 1995-96.

Berlusconi just survived the latest of several confidence votes in the lower house of the Italian parliament earlier this month.