After another day of hectic consultations, the centre-left government of Mr Romano Prodi last night seemed close to an agreement with its rebellious allies, Rifondazione Communista. For a week the Communist Refoundation has threatened to withdraw support in protest at $3 billion worth of pensions and social welfare cuts contained in the government's $14.5 billion deficit-cutting budget for 1998.
As negotiations continued into the night, it appeared that Rifondazione may accept compromise proposals on its four key demands: legislation introducing a 35-hour working week, the creation of a semi-state body that would employ 300,000 people by 2002, reductions in the cost of prescription drugs and no cuts in seniority pensions.
The final showdown comes this afternoon when the Chamber of Deputies reconvenes to conclude the budget debate prior to a vote that has become a de-facto confidence motion. If the government and Rifondazione have settled their differences, Rifondazione's 35 deputies will once again guarantee the government's survival.
Mr Prodi began the day in the Senate where he repeated his contention that Italy's participation in the start of European Monetary Union would be jeopardised by the collapse of his government. The Prime Minister argued that it was madness to fall short of the EMU goal after a 17-month period in which his government had pushed through $58 billion worth of deficit-reduction measures, reducing inflation to 1.4 per cent and bringing Italy's GDP-deficit ratio to close to 3 per cent, as required by the Maastricht convergency criteria.
Later in the day, the Deputy Prime Minister, Mr Walter Veltroni, a key interlocutor between the government and Rifondazione, expressed cautious optimism.
The Rifondazione leader, Mr Fausto Bertinotti, was equally cautious about the ongoing negotiations, saying last night: "If they're roses, they'll blossom."
As the prospect of a last-minute compromise became more realistic, commentators such as EU Commissioner Mr Mario Monti issued an appeal for Italy "not to jeopardise the great effort it has made to join the single currency with a political crisis". Mr Monti warned the government against forging a deal which would get Italy into EMU, but with "a leg in plaster just when it has to run against more competitive rivals".
As the day progressed, the currency markets expressed their belief in a resolution to the crisis by supporting the lira. At close of trade, the Italian currency had gained three points at 980 lire to the deutschmark. Despite the political uncertainty of the last week, the lira has remained relatively steady on currency markets, with traders evidently convinced that this "Italian spat" would be resolved.