* Rehn warns Italian political uncertainty hurting growth
* Criticises Italy for scrapping housing tax
* Letta government under threat
* Rehn rebuked by left- and right-wing politicians
By Giuseppe Fonte
ROME, Sept 17 The European Union's top economic
official told Italy's parliament its fragile economy cannot
afford political instability and criticised recent decisions on
"Particularly in Italy, where the economy is weak, political
uncertainty is a brake on investments," EU Economic and Monetary
Affairs Commissioner Olli Rehn said in testimony to the joint
budget committees of the upper and lower houses on Tuesday.
Rehn's visit comes at a time of acute political tension in
Italy and concerns that its public finances are going astray.
Centre-right leader Silvio Berlusconi has repeatedly
threatened to withdraw from Enrico Letta's coalition government
if Letta's Democratic Party votes to expel him from parliament
after a tax fraud conviction last month.
A parliamentary vote over Berlusconi is scheduled for late
Rehn said Italy's scrapping of an unpopular housing tax
(IMU) at the end of last month raised concerns about the
country's management of its public accounts, and that Italy
needed a long period of structural reforms to improve its
economic growth potential.
"We have recommended switching taxation from production onto
property and consumption, so the abolition of the IMU goes in
the opposite direction," Rehn said.
Letta abolished IMU on primary residences last month at the
insistence of Berlusconi's People of Freedom (PDL) party.
The Commission "has a duty to request corrections" when
member states take decisions that are not consistent with their
commitments, Rehn said.
He added that a new "Service Tax" with which Italy has
promised to replace the IMU from next year "could be consistent
with our recommendations, it depends how it is set up."
Italy, which is mired in its longest post-war recession, is
struggling to hold its budget deficit below the EU's 3 percent
of economic output ceiling, and on Friday it will hike its
forecast for public debt to a new record above 130 percent
Berlusconi has been threatening for weeks to torpedo Letta's
uneasy left-right coalition, causing market nervousness and a
rise in Italian borrowing costs.
Bond yields fell on Tuesday after political sources said
advisers seemed to have finally convinced the media tycoon that
the hardline stance could misfire for the PDL and for his
Italy needs to improve its competitiveness by reducing
labour costs, as has been achieved in Spain, Portugal and
Ireland, Rehn said.
In the tense political environment, he met some hostility.
"Rehn is worried about the abolition of IMU in Italy? Well
we are worried that someone like him has influence in Europe,"
said Maurizio Gasparri of Berlusconi's PDL.
Deputy Economy Minister Stefano Fassina, from Letta's
Democratic party, said on Sunday that Rehn "should think about
the mistakes the European Commission has made in all these years
instead of continuing to give us lessons."