Italy Approves Austerity Measures (Minus the Anarchic Riots)

Posted: Aug 13, 2011 8:52 AM

In order to avoid becoming further embroiled in the debt crises sweeping the euro zone, the Italian government on Friday approved legislation entailing $65 billion of emergency austerity measures. The plan includes various tax increases as well as entitlement reforms in an ambitious effort to close Italy's deficit gap, from a projected 3.9 percent of gross domestic product this year to a balanced zero by 2013. Italy currently has the second largest debt in the euro zone, standing at 120 percent of GDP, prompting this move towards fiscal sanity - and so far, it seems, the Italians are taking it reasonably well (unlike the Greeks earlier this summer).

The plan will raise the capital gains tax, increase levies on the highest earners, cut government spending and reduce funding to regional administrations. The plan was passed last night in Rome by decree, meaning it will take effect immediately and then must be approved by parliament within 60 days.

"Our heart is bleeding as we have always maintained that we wouldn't put our hands in the pockets of Italians, but the international scenario has deeply changed," Berlusconi said after the meeting. "The measures go in the direction that the ECB wanted."

The European Central Bank had asked Italy to make additional budget cuts before it would buy the nation's debt on the market in a bid to arrest surging borrowing costs. Yields on Italy's 10-year bond have plunged 105 basis points since the ECB started the purchases on Aug. 8, after reaching a euro-era high of 6.3 percent on concern Italy would become Europe's next debt victim.