Italy has long road to avoid financial collapse

AP News
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Posted: Aug 06, 2011 12:50 PM
Italy has long road to avoid financial collapse

Premier Silvio Berlusconi faces a tough battle and likely opposition from political rivals and some unions if he is to enforce measures aimed at avoiding Italy's financial collapse and boosting the country's stagnant economy.

While the new moves announced Friday by the government were welcomed by some analysts, others criticized the measures to spur growth as too vague and some in the opposition demanded a change of government _ an option Berlusconi dismisses.

Berlusconi's government devised a euro70 billion ($99 billion) austerity package last month. But on Friday, after intense pressure from markets and fellow European leaders worried that Italy might become the next victim of Europe's debt crisis, Berlusconi agreed to speed up the process.

"In a month, the world has changed," Finance Minister Giulio Tremonti said in announcing the measures alongside Berlusconi on Friday evening.

Crucially, the government agreed to bring forward its goal of balancing the budget in 2013 instead of 2014 as originally planned. It also has promised to make the balanced budget a constitutional requirement.

The measures are seen as paving the way for a possible move by the European Central Bank to buy Italian bonds in an effort to bring down the country's borrowing costs. The bank has not confirmed this, but a close Berlusconi ally and Italian Cabinet minister, Umberto Bossi, said the bank "has assured us that starting Monday it will buy our bonds," according to the ANSA news agency and other news reports.

The government hopes to generate between euro17 billion and euro20 billion (between $24 billion and $28 billion ) through cuts to its pensions system, which was brought forward to the 2012-2013 period. It also will enforce cuts to tax breaks.

"Italy is complying with all the main requests of fiscal hawks," said Alan Ruskin, an analyst at Deutsche Bank, foreseeing a positive impact for Italy's bonds. But, he added, "the sheer scale of Italian debt relative to possible future official support will still leave it vulnerable to (monetary union) contagion from elsewhere."

Italy's debt is among the highest in the eurozone at nearly 120 percent of GDP, but poor growth is viewed by many as he overriding issue. Italy is expected to grow only by 1 percent this year, according to some estimates.

The government's move, announced after the markets had closed Friday, capped a week that saw the Milan Stock Exchange consistently fall. Italy's borrowing costs rose above Spain's for the first time in more than a year, heightening concerns over the health of the eurozone's third-largest economy.

Berlusconi said Friday he is open to new ideas, including from his bitter rivals in the center-left opposition. But it remains unclear how much support Berlusconi would get from his political adversaries in a country that, despite calls for national unity, remains highly polarized.

After Friday's announcement, some in the opposition signaled the possibility of supporting the government or working with it, saying the new measures marked a departure and a step in the right direction. But many insist Berlusconi first must go. Critics say Berlusconi's weakened leadership, amid sex scandals and legal woes, adds to the market concerns because it makes it harder for him to pass unpopular measures and focus on reforms.

Berlusconi's five-year term ends in 2013, and on Saturday the prime minister dismissed speculation he might step down next year and push for early elections.

"This was never an option," he told reporters outside his Rome residence, according to the ANSA news agency.

Tremonti is hoping to liberalize the labor market by reforming the workers' chart and making it easier to hire and fire workers. He wants more direct negotiations between companies and employees' unions, rather than the blanket regulations of the workers' chart. He also wants to liberalize services and cut red-tape to set up business _ broadening the constitutional provision sanctioning that private enterprise in Italy is free.

Tremonti is set to present some of these proposals next week to parliamentary commissions hastily reconvened despite the summer recess.

However, any constitutional change requires a lengthy and complex parliamentary procedure and a qualified majority. Berlusconi has a majority in parliament but would need support from some opposition forces to obtain a qualified majority.

The labor market changes promise to be very divisive because of opposition from at least some unions. Previous attempts to liberalize the market was met with huge demonstrations.

"In the case of the labor-market reform, it is not difficult to foresee a complicated journey and one that will potentially be divisive for unions," said Saturday's financial daily Il Sole 24 Ore.

The leader of the largest Italian labor confederation, Susanna Camusso, wasted no time in criticizing of the new measures. "To move forward the measure means to destroy the country," she said in a newspaper interview.