Italy approves austerity package to calm investors

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Posted: Jul 15, 2011 4:31 PM
Italy approves austerity package to calm investors

Italy cleared a euro70 billion ($99 billion) austerity package on Friday to reassure nervous investors that the eurozone's third-largest economy will not succumb to the debt crisis.

Berlusconi's government fast-tracked approval of the package measures _ initially set for later this summer _ and increased their scope after markets plummeted this week on worries over the country's financial stability.

Italy's future is crucial to Europe's hopes of surviving the debt crisis because the country would be far too expensive to bail out.

The lower house of parliament passed the austerity measures by a vote of 314-280, hours after Premier Silvio Berlusconi's government survived a confidence vote. The package was approved by the Senate on Thursday.

"Italy is stronger after the approval of these measures even if unknown factors of the economic crisis remain," Berlusconi was quoted saying by the LaPresse news agency. He pledged economic reforms in the next two years, and urged the opposition to work with the government to achieve them.

The measures were approved as five Italian banks announced they had passed European stress tests. Both moves came after the markets closed, however, so their impact on the markets can only be measured next week.

Amid the uncertainty, traders had been cautious in the run-up to the vote. The Milan Stock Exchange's benchmark FTSE MIB closed down 1 percent to 18,450.45, and spreads on 10-year Italian bonds versus the German bund touched 300 points _ near a record _ on Friday.

"The measures are necessary," Stefano Folli, a leading political commentator, told The Associated Press. "They are not sufficient because Italy needs to reform structurally."

The fact that bond spreads remained high on Friday showed that the markets still were not fully confident, and were waiting for more from the government, he said.

"It is necessary to put together a radical and incisive program of reforms, very rapidly. This is what the government needs to focus on, if it is capable, and if not another government needs to do it."

Berlusconi, who remains under pressure from the opposition to resign, has been criticized for remaining out of the public eye at a time of crisis. He showed up Friday for the vote of confidence, however, his first public appearance in about a week.

"I've not been absent or missing," Berlusconi said, according to the ANSA news agency. "On the contrary, these past days I've read all the documents, I've worked for the good of Italians."

Opposition lawmakers maintain the government is too weak and divided to handle to the financial turmoil, and should just give up.

"If Italy was the target of markets' attacks, it is because this government's policies have no credibility," said Rosy Bindi, the president of the opposition's strongest force, the Democratic Party.

Market fears grew this week that the financial crisis engulfing Greece, Ireland and Portugal might spread to Italy, a country marked by high debt and low growth, and far too expensive for Europe to rescue.

Italy's debt is among the highest in the eurozone at nearly 120 percent of GDP, but poor growth is viewed by many as the overriding issue.

The austerity package seeks to balance the budget by 2014 and contains 16 measures to spur growth, according to Tremonti, who spearheaded it.

It includes increases in health-care fees, cuts to tax breaks and high-end pensions, raises in the retirement age and public-sector salary freezes. The government is also looking into privatizing state-owned companies such as the state railway or postal services once the crisis eases.

Despite its criticism of the measures, the opposition refrained from presenting filibustering amendments _ a common practice with budget laws. But opposition leader Pier Luigi Bersani pledged to abolish the increase in health care fees, and substitute it with another measure

"These are shamelessly classist measures that hit the weakest and poorest people, do not produce reforms and do nothing for growth," Bersani said.

Among the criticisms of the measures is that cuts to political costs are backloaded to 2013-2014, after Berlusconi's current term expires. To increase their impact, the Senate reduced tax breaks in that period _ placing the burden on individuals.

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Colleen Barry in Milan contributed to this report.