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Italy prepares to pass austerity package

July 14, 2010

By Guy Dinmore in Rome

Italy’s senate is today expected to approve the centre-right government’s controversial 25bn euro austerity package with Silvio Berlusconi resorting to a vote of confidence to ram through his cuts in the face of considerable dissent from within his own coalition.

The unpopular package is then expected to be taken to the lower house for final approval, again in a vote of confidence, by the end of the month.

Caught between the ire of regional governments which will bear the brunt of the cuts, and the rigidity of Giulio Tremonti, finance minister and architect of the bill, the prime minister’s mid-term crisis has been deepened by his handling of a spate of corruption scandals involving ministers and senior officials.

While the government is unlikely to collapse over the emergency budget, few commentators are betting on Mr Berlusconi,73, surviving his internal power struggles and seeing out his full five-year term in office to 2013.

Given Italy’s relatively contained budget deficit, the proposed cuts for 2011-12 are not as drastic as those implemented by Greece, Ireland or Spain. Yet the possibility of Italy struggling to maintain payments on its state debt – projected by some economists to rise to 120 per cent of GDP by the end of next year – has forced Mr Tremonti to take action.

“Perennially weak growth and a mountain of government debt mean that the Italian public finances are a potential time-bomb waiting to explode,” London-based Capital Economics noted earlier this month.

“Indeed, we think the size of the government’s debts will eventually prompt the markets to turn their sights on Italy and a default is a distinct possibility,” it said, airing a view that, for the moment at least, is not shared by most economists.

Ben May, Italy analyst for Capital Economics, said yesterday that the government might need to implement further cuts to meet the 3.0 per cent deficit target by 2012 if economic growth came in lower than official forecasts, which he thought likely.

As 10bn euros of the austerity package are projected income from a crackdown on tax evasion, the bulk of the cuts – some 8bn euros – will fall on regional and local governments.

A wage freeze in the public sector and deferred pensions have also run into widespread opposition, while industry has lobbied against reductions in incentives for renewable energy and a rise in tariffs for insurance companies.

“It is all on the shoulders of the local authorities,” commented Sandro Gozi, member of parliament for the opposition Democratic party. “It is clear this will lead to raising taxes at the local level or a fall in the quality of services.”

“Unemployment will grow and economic growth will remain at the lowest in Europe as it has done over the past decade,” he told the FT, lamenting the lack of growth-promoting measures in the emergency budget.
After meeting eurozone finance ministers in Brussels on Tuesday, Mr Tremonti declared of the proposed cuts: “There was no retreat on the numbers or the details.”

The senate yesterday debated the government’s latest “maxi-amendment” to the package which had become stalled by the tabling of over 1,200 proposed changes.

Debate was held in such arcane details as how cuts in education would change the size of classes with handicapped students. The government is also using the bill to protect special interest groups, angering its own agriculture minister by delaying payments of fines to the European Commission by farmers exceeding milk quotas.

Mr Berlusconi’s difficulties in parliament have compounded the image of a government struggling to lead from the front despite its sizeable majority.

A vote of no-confidence tabled by the opposition for next week over Nicola Cosentino, a senior Treasury official, also threatens to divide the government. A powerful politician from Naples, Mr Cosentino is under investigation for his possible role in a suspected “secret society” of businessmen, politicians and magistrates which led to three arrests last week. He has denied wrongdoing.

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