Italy austerity plan gains approval

Italian prime minister Mario Monti has won widespread praise for his €30bn austerity package, which he said was designed to “save Italy”.

Monti also won the backing of most Italian political parties, when he presented the plan in Parliament yesterday. However, the country’s unions have been angered by pension reforms and are planning strikes.

Monti said he will honour his predecessor Silvio Berlusconi’s pledge of a balanced budget by 2013. His measures were presented as one decree, to be implemented immediately without the need for prior parliamentary approval. Monti has been given 60 days before he has to return to parliament to seek their approval.

The markets responded positively to the austerity plan. UniCredit economists Chiara Corsa and Loredana Federico said in a note that the package was “sufficiently bold” to enable Italy to meet its balanced budget target in 2013 and put the nation’s ratio of debt to GDP of 120% on “a downward trajectory very soon”.

On news of the package, the yield on 10-year Italian bonds and German bunds fell by 73 basis points, to 5.95%, the lowest since the end of October.

However, Standard & Poor’s announcement yesterday that it was putting the entire Eurozone debt on credit watch pushed yield on Italy’s 10-year bonds back up nine basis points to 6.05% at opening of business this morning in London. S&P said Italy runs the risk of being cut by two levels, along with France, Spain, Portugal and Ireland.

Growth predictions for 2012 were revised down to -0.4% from 0.6%. For 2013, the forecast is 0%, down from 0.9%.

The austerity plan’s measures include increased taxes on luxury items and property, value added tax, tougher tax evasion measures and raising the pension age. Tax increases on property alone are expected to net about €10-11bn, equivalent to the amount of the package destined to boost the economy. Monti decided against both a ‘wealth tax’ and an increase in tax rate for top earners.

Some measures were designed to boost growth. These include tax breaks for companies hiring young people and women, and for the financing of infrastructure projects.

Pension reforms have won praise for their ambition and making possible a reduction in long-term liabilities, but provoked anger from the unions, who have promised a strike next week in protest. The measures include raising the retirement age for many workers, end cost-of-living adjustments on most pensions and link payouts to contributions rather than salary levels.

Set in the context of the overall challenge that Italy is facing, the austerity package is one step in the right direction. The €30bn austerity package looks small against the €300bn in debt that has to be refinanced in the next 12 months, itself only a fraction of the €1.9 trillion mountain of debt.

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