European leaders demanded that euro members press on with budget cuts to end the debt crisis as Italy edged closer to a new election after an anti-austerity vote last week caused political deadlock.

Finance ministers from the 17-member single-currency bloc meet in Brussels Monday to discuss issues such as a bailout for Cyprus. In Rome, a top aide to Democratic Party leader Pier Luigi Bersani said the country may need to hold another election this year after passing new electoral laws.

“Now in Europe, after the Italian election, it seems to be a case of either austerity and savings programs or growth, but that’s a completely false premise,” German Chancellor Angela Merkel said at an event on March 1.

European Union (EU) Economic and Monetary Affairs Commissioner Olli Rehn echoed those comments this weekend, telling Der Spiegel magazine that there’s no scope for the bloc to let up on budget discipline.

Italian political instability, after last week’s election resulted in a four-way split, threatens to revive concern about the deepening of the debt crisis.

Voters in the bloc’s third- largest economy revolted against German-inspired austerity measures, handing the party of comedian-turned-politician Beppe Grillo more than 25 percent of the vote with its anti-spending cut message and a call for a referendum on euro membership.

Italian Image

Italian 10-year bonds climbed to a three-month high last week, jumping 34 basis points to 4.79 percent. Still, Spanish bonds rallied along with Greek and Portuguese securities on speculation that the European Central Bank, which cooled a market panic last year with a pledge to buy sovereign debt, will maintain control over the three-year-old debt crisis.

Italian President Giorgio Napolitano told political leaders yesterday to put the public interest and the country’s international reputation first as Grillo reiterated that his party, the 5 Star Movement, won’t back any government.

Bersani, whose faction won the most votes, has resisted cooperation with former premier Silvio Berlusconi, calling into question whether he can find common ground with Grillo’s upstart movement.

Italy may hold new elections this year if Bersani and his Democratic Party fail to find enough backing in parliament to form a government, Stefano Fassina, the group’s economic policy spokesman, told Sky TG24 TV Sunday.

There are no other alternatives than to hold a new vote “in a few months” should Bersani fail to find a majority, he said. “We should name a new president, change the electoral law and then return to polls as soon as possible.”

No Whip

The election showed voters rejected the austerity policies of Prime Minister Mario Monti and that a new technocratic government isn’t the answer, Fassina said. The euro area isn’t on the right path to end the debt crisis, he said.

Merkel, speaking two days ago at an event in Greifswald on Germany’s Baltic coast held by her Christian Democratic Union, urged Italy not to stray from the path of reform, saying that her stance on deficits is “not about liking to whip people.”

Rehn, the EU’s budget enforcer, said the bloc has no leeway to depart from its course of reining in spending and debt.

“We’re not going to solve our growth problems by piling new debt on the old,” Rehn told Spiegel in an interview.

Euro ministers navigating the crisis will discuss issues including Cyprus, which has since June been in talks on receiving the bloc’s fifth rescue package. The ministers want to reach an agreement by next month after voters on the Mediterranean island last week elected Nicos Anastasiades its new president.

Certain Solution

Anastasiades has to revive the stalled talks as Cyprus seeks aid that could reach the size of its almost 18 billion- euro ($24 billion) economy. The negotiations have been hampered by issues such as state asset sales, the presence of Russian wealth and the prospect of a debt writedown.

Rehn, in comments to Spiegel, said assistance to Cyprus is crucial, since a disorderly default would result in the country’s exit from the euro area. He also reiterated the European Commission’s position against a debt writedown or imposing losses on depositors in the Cypriot banks.

“I’m certain that we’ll find a solution that addresses the concerns of all euro countries,” Rehn told the magazine.