Italy's Monti faces key final vote on austerity

Reuters News
Posted: Dec 21, 2011 6:18 PM
Italy's Monti faces key final vote on austerity

By Steve Scherer

ROME (Reuters) - Italian Prime Minister Mario Monti faces a confidence vote on Thursday that he called to speed up final approval of a 33-billion-euro ($43 billion) austerity package aimed at restoring market confidence in the euro zone's third-biggest economy.

Just five weeks ago Monti replaced Silvio Berlusconi as prime minister and formed an administration of technocrats with broad parliamentary support to pass the so-called "Save Italy" measures. The law, which the Senate will vote on in the early afternoon, should pass easily.

Berlusconi's failure to tackle major reforms put Italy at the centre of the euro zone debt crisis. Monti managed to put together a painful series of tax hikes, spending cuts and a pension overhaul.

The government passed the package in the lower house with a confidence vote last week to eliminate debate on dozens of amendments. A confidence vote was called in the Senate to ensure the law's passage before Christmas.

The confidence votes also allow the parties supporting Monti's government to say that they are backing the law out of a sense of responsibility, even if they don't agree with many of the measures.

Both Berlusconi's People of Liberty Party (PDL) and the centre-left Democratic Party have misgivings about the tax increases and the pension changes respectively, but know they cannot sabotage its passage without unleashing an economic catastrophe and a possible default.

Monti has argued that restoring confidence in Italy is paramount to saving the euro zone, but the severity of the package has taken a toll on his popularity, which fell to 46 percent from 61 percent the previous week, according to a poll published in Corriere della Sera on Sunday.


The austerity package will also hurt economic growth at a time when the economic outlook is already bleak, economists say.

Monti has said he was confident that markets will eventually react positively to Italy's efforts, arguing that lower interest rates would help offset the effects of the austerity measures on growth.

While bond yields have come down, with the 10-year steadily below 7 percent, the austerity package has failed to bring them back to more sustainable levels of about 5 percent.

Last week, ratings agency Fitch placed Italy and five other euro zone countries on a downgrade warning in the absence of a "comprehensive solution" to the debt crisis.

Though his government looks set to pass the first test, even bigger challenges are on the horizon.

Monti has pledged a comprehensive series of liberalizations, especially of the nation's services sector, which are protected by entrenched special interests.

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He has said his government may ease firing restrictions on salaried workers, which has set the stage for a clash with powerful unions.

Italy's economy has expanded an average of 0.4 percent per year for the past decade, and so tackling Italy's growth problem is a necessity.

It shrank 0.2 percent in the third quarter, compared with 0.5 percent growth in Germany and 0.4 percent in France, and economists don't predict a recovery until the second half of next year.

The main employers' lobby, Confindustria, forecasts a 1.6 percent decline in gross domestic product in 2012, four times worse than the government's forecast for a 0.4 percent fall.

After the passage of Italian austerity, the euro zone will have to step up its efforts to boost growth and put an end to the region's sovereign debt crisis, Monti has repeatedly said.

The package went into effect on Dec 4, when it was passed by the Cabinet, but needed parliamentary approval within 60 days to become permanent legislation.

(Reporting By Steve Scherer, editing by Philip Pullella and Matthew Jones)