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Berlusconi ally blasts German banks, Monti cuts

By James Mackenzie

ROME (Reuters) - German banks created Europe's debt crisis and the cuts demanded of Italy are driving the economy deeper into recession, the economic chief of former Prime Minister Silvio Berlusconi's party said on Friday.

Renato Brunetta, a leading voice on Italy's centre-right, also said an exit from the euro could not be ruled out if Rome were forced to remain on its rigid diet of budget austerity - a line often taken by Berlusconi and his allies but one on which they have shown no sign of acting.

With an election due by April at the latest, the comments by Brunetta, minister for public administration in the last government, add to the uncertainty over what will follow Prime Minister Mario Monti when he departs.

Brunetta, who left office when Berlusconi fell at the height of the crisis last November, accused Monti - a technocrat appointed to run Italy until the polls - of pushing austerity to excess and strangling an already feeble economy, which the government expects to contract by 2.4 percent this year.

"It doesn't even convince the markets," he told Reuters in his office in Berlusconi's Rome headquarters. "It's like those old diet ads. If I tell you I'm going to lose seven kilos in seven days, it's not credible, it leads to collapse."

He said Monti's agenda was a copy of the tight budget policies already pursued by Berlusconi and former Economy Minister Giulio Tremonti, but compounded by excessive new taxes and bungled labor and pension reforms.

How far Brunetta's argument would translate into real policy change if the centre-right were to win next year's election is unclear. His People of Freedom (PDL) party is deeply divided and would rely on centrist coalition partners if it is to have a chance of victory.

The brutal realities of the bond markets, which forced Berlusconi to step down last year after borrowing costs shot up to levels which threatened disaster, will also tie the hands of whichever government emerges.

But Brunetta's words highlight the heavy pressure within much of the political class in Italy for a change to Monti's painful mix of tax hikes and spending cuts allied with a measure of structural reform aimed at making the sickly economy more competitive.

EURO ZONE EXIT?

Brunetta had harsh words for policy decided at the euro zone level and although he denied being a eurosceptic, he said an exit from the euro could not be ruled out.

"Who says it's impossible to leave the euro? There is an enormous amount of literature that says it's possible," he said.

Market distrust of Italy last year sent yields on its 10 year bonds as high as 7.6 percent, the kind of levels which forced Greece, Portugal and Ireland to seek international help.

But Brunetta said the wider euro zone crisis, rather than the scandals and infighting which tore apart the Berlusconi government, was the driving factor behind the panic which threatened to cut off its access to the market.

Italy, despite a decade of economic stagnation and a public debt set to top 125 percent of gross domestic product this year, had been unjustly singled out for blame, he said.

"My thesis is that the crisis is a crisis in the euro, produced by German banks," he said, arguing that the euro zone was paying for their excessive exposure to high yielding paper.

"I would like to see an investigation into the German banks," Brunetta said.

Markets had targeted the bonds of Italy and Spain to capitalize on the crisis of the euro zone as a whole, he continued, rather than due to the real weak points of the two nations, namely Italy's huge debt and Spain's fragile banks.

Brunetta's comments echo a long running argument over the relative responsibility in the crisis of the strained public finances of southern Europe or the bloated surpluses of the prosperous northern countries, especially Germany.

"It's this Calvinist analysis. If you're poor, it's your fault, if you're rich, it's because God loves you," he said.

(Reporting by James Mackenzie; editing by Patrick Graham)

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