Berlusconi and Blair push ahead with new alliance

Tony Blair is forging a close alliance with Italy's controversial premier and media magnate, Silvio Berlusconi, and plans to seal the Anglo-Italian axis with an agreement on economic policy next week.

Mr Blair, the first European Union prime minister to hold talks with Mr Berlusconi after his election, is now going out of his way to stress common ground with his Italian counterpart, in contrast to other European leaders who have kept their distance.

Since coming to power last year Mr Berlusconi has provoked outrage with remarks on the superiority of the West to the Muslim world, and sought to block two EU initiatives.

Concern over the direction of Italy's policy towards Europe spread when the country's pro-European Foreign Minister, Renato Ruggiero, resigned and Mr Berlusconi added the foreign affairs portfolio to his prime ministerial duties. But Friday week's Anglo-Italian summit in Rome is already being presented by some Italian newspapers as an end to Italy's recent period of isolation.

The joint declaration, which is still being drafted, will promote a new UK-Italy trade agreement and call for labour market reform within the EU. But it is also expected to demand that European countries agree, by the end of the year, to set a date in the near future for the liberalisation of commercial energy supplies in the EU. It is also likely to call for a calendar for the freeing of the domestic energy market.

Downing Street said yesterday it was "working with Italy on a range of issues including economic reform" and added that it is "committed to working with all EU partners in terms of this agenda".

The move comes ahead of a summit on economic reform in Barcelona next month at which little progress is expected on this highly sensitive topic. France, which faces elections within weeks, is blocking an early deal and is likely to receive support from Germany. With elections also looming in September, Gerhard Schröder, the German Chancellor, is adopting an increasingly hostile and populist stance toward initiatives, recently criticising a move by the European Commission to free the car sales market.

Some observers fear that the EU will be reduced almost to paralysis, with no progress on important subjects such as enlargement, during the next six months.

With support for economic reform waning in France and Germany, Mr Blair is trying to build an axis with the centre-right governments in Italy and Spain. He already has a strong rapport with Jose Maria Aznar, the Prime Minister of Spain, who is a firm supporter of economic reform.

The Government hopes that the Barcelona summit can still produce a positive statement on energy liberalisation. One Foreign Office official argued yesterday: "We are not downbeat but realistic."

Mr Blair also sees common ground with Mr Berlusconi over the future of Europe. The Italian premier has stressed the importance of "parliaments and governments" and argues that "the general principle of subsidiarity must always reign supreme". Italian diplomats talk of wanting a "more British approach" to EU policy.

Relations between Britain, Italy and Spain have blossomed since the Gothenburg EU summit last June. At the time Alejandro Agag, a senior Spanish MEP and ally of Mr Aznar, told journalists that the "BAB" axis – Berlusconi-Aznar-Blair – would be influential in shaping Europe's future.