ROME (Reuters) - Italian Prime Minister Mario Monti warned against a slide into populism on Tuesday as Silvio Berlusconi attacked his technocrat government, accusing it of failed "Germano-centric" policies that had dragged Italy into recession.
With elections now expected in February, financial markets have reacted nervously to the return of Berlusconi to seek a fifth term as prime minister, just over a year after being forced from office at the height of the financial crisis.
In a possible foretaste of the election campaign to come, the 76-year-old media billionaire laid into Monti's technocrat government, which he said had accepted failed policies dictated from Berlin.
"The Monti government has followed the Germano-centric policies which Europe has tried to impose on other states and it has created a crisis situation much worse than where we were when we were in government," Berlusconi said in an interview on his own Canale 5 television network.
He dismissed the sharp drop on financial markets which followed news of his return, saying the main gauge of investor trust in Italy, the spread between Italian bonds and their safer German counterparts, was "a con".
He also accused Germany of deliberately speculating on the euro zone debt crisis to favour its banks and drive down its own borrowing costs.
Berlusconi's remarks prompted a sharp response from Berlin, where German Foreign Minister Guido Westerwelle said that it was unacceptable "for Germany to be made the target of a populist election campaign."
Speaking on state television on Tuesday, Monti left his own political future open but defended his government's economic record and warned against "oversimplified" election promises that hid the true problems facing Italy.
"It's important that there is this self-discipline on everyone's part so as not to create ruptures with Europe and above all not to treat people like fools but like mature citizens," he said.
"A QUESTION OF CULTURE"
Financial markets were calmer on Tuesday and the spread between Italian and German 10-year bond yields narrowed to 340 basis points from more than 360 points on Monday, well off the peak of over 550 points when Berlusconi lost power a year ago.
Monti, an economics professor drafted in to head an unelected government, has been widely credited with restoring Italy's international credibility and a growing list of European policymakers has lined up to sing his praises.
German Chancellor Angela Merkel said she supported his reform agenda and was confident it would continue. "I am sure the Italian people will vote in such a way that Italy stays on the right path," she told reporters in Berlin.
Despite speculation that he could remain in politics, the former European commissioner has said he is concentrating on his remaining time in government and not thinking about whether to stand as a candidate in the election expected in February.
He again left his own political plans open, refusing to confirm speculation that he could join a centrist grouping or lend his name to a pro-European reform party.
"Politics is above all a question of culture, that is, trying to give direction to people's ideas," he told state television station RAI.
"I think I did it when I was a professor, I'm trying to do it in this brief period when I'm prime minister, I'm sure that, whatever hat I'm wearing in future, I will continue to do it."
Whether or not he stands for a new term in office, there has been wide speculation that Monti could become Italy's next president, an office which would allow him to play a crucial role in influencing the overall political debate.
"THE SPREAD IS A CON"
Opinion polls give Berlusconi's squabbling centre-right People of Freedom (PDL) party little chance of winning the vote, with centre-left leader Pier Luigi Bersani seen for now as Monti's most likely successor.
However Berlusconi could still have a chance of winning enough votes in the Senate to prevent a stable Bersani government being formed if he can patch up an alliance with his former coalition allies in the regionalist Northern League.
Berlusconi, who has made Germany the target of some of his fiercest attacks, said Germany had worsened Italy's crisis last year by ordering all its banks to sell all the Italian debt securities they held in their portfolios.
"This fact brought in 7, 8, 9 billion in revenues. The other American and international funds thought, if Germany is selling, there must be something behind it and they sold too," he said.
He scorned markets and the risk premium over German bonds, a staple of Italian news reports for more than a year.
"The spread is a con, an invention used to defeat a government majority voted for by Italians," he told Canale 5.
"We never heard of it before. People have only been speaking of it in the past year and what does it matter?"