Italy Approves 30B-Euro Emergency Plan

Italian Prime Minister Mario Monti announced 30 billion euros ($40 billion) of austerity and growth measures as he seeks to cut the euro-region’s second-biggest debt and prevent a breakup of the euro.

Monti’s Cabinet in Rome passed the measures a day earlier than planned as the new prime minister rushed to reassure investors he is serious about taming a debt of almost 1.9 trillion euros. The premier will present the package, which includes more than 12 billion euros in spending cuts, to both houses of parliament tomorrow.

“The huge public debt of Italy isn’t the fault of Europe, it’s the fault of Italians because in the past we didn’t pay enough attention to the well being of the young and the future adults of Italy,” Monti said at a press conference in Rome today after his Cabinet passed the package.

Monti, sworn in on Nov. 16 after Silvio Berlusconi resigned, is under pressure to move quickly as a selloff of the country’s bonds sent borrowing costs surging last month past the 7 percent threshold that led Greece, Ireland and Portugal to seek aid. Italy is seen as too big to bail out with 450 billion euros of bonds maturing in the next three years, more than the current size of the EU’s rescue fund.

Tears at Briefing

Monti’s Cabinet adopted the measures after a three-hour meeting in Rome and then presented the plan in an emotional two- hour press conference. Labor Minister Elsa Fornero broke into tears as she described the sacrifices the government was asking workers to make and explained that all but the lowest pensions would no longer be indexed to inflation.

The plan includes 20 billion euros of austerity measures and another 10 billion euro of proposals that aim to boost growth of an economy whose expansion has trailed the European averaged for more than a decade. Italy’s economy will contract 0.4 percent to 0.5 percent in 2012, Deputy Economy Minister Vittorio Grill said at the press conference.

The package touches on all aspects of Italian society with items aimed at shrinking the size of the government, raising the retirement age, forcing all transactions of more than 1,000 euros to be done electronically to fight tax evasion, an increase of the sales tax of two percentage points, and tax breaks for companies that hire young workers and women.

Tax Increases

The government dropped a plan to raise the tax rate on Italy’s highest earners, though it will increase levies on luxury goods and resurrect a property tax on first homes.

“It’s a very tough package, but we don’t have any choice except to pass it,” Emma Marcegaglia, head of employers’ lobby Confindustria, said in comments broadcast on Sky TG24 today after meeting with Monti. “The plan is key to saving Italy and preventing the collapse of the euro.”

The Italian budget package comes at the start of a critical week for Europe’s efforts to end the debt crisis and prevent Italy and Spain from succumbing and causing a breakup of the single currency. German Chancellor Angela Merkel meets French President Nicolas Sarkozy tomorrow to advance a plan for stricter enforcement of the region’s deficit rules that will be presented to European Leaders at a summit on Dec. 8.

Markets tension eased last week as investors bet that the summit would make progress on unifying budget policy that could leave for more robust support from the European Central Bank or eventual issuance of euro-region bonds.

Bond Rally

Italian 10-year bonds rallied for the first week in eight, with the yield falling 58 basis points over the week to 6.68 percent. That narrowed the yield difference over similar- maturity German bunds by 45 basis points to 4.55 percentage points. Even with the decline in yields, Italy is paying the highest rates in more than a decade to attract buyers for its debt and offered more than 7 percent on new bonds for the third time in a week on Nov. 29.

Italy’s budget deficit of 4.6 percent of gross domestic product last year is less than France and half that of the U.K., and the measures may help the government achieve its goal of balancing the budget in 2013. The country’s debt is larger than Greece, Spain, Portugal and Ireland combined.

Monti spent the weekend meeting with leaders of the main political parties, unions, employers and social groups to try to build support for the plan before it goes to parliament. Monti, an economist and former European Commissioner, was chosen by President Giorgio Napolitano to lead Italy after Berlusconi’s resignation and the professor, as he his known, has no political base in parliament.

Bitter Medicine

“Medicine is always bitter, but sometimes it’s necessary to prevent the patient from dying,” Pierferdinando Casini, head of the Union of Centrists party, said yesterday after meeting with Monti.

The measures the new government plans to take are severe and necessary to “make Italy better,” the leader of Berlusconi’s People of Liberty party, Angelino Alfano, said yesterday after the talks. “Monti has been called in precisely to take decisions which are far from easy, and we are aware of this,” he said.

Union leaders were less supportive. The government’s proposals are “indigestible,” and “we are ready to counter the wrong decisions” that will be made, Susanna Camusso, head of Italy’s biggest union, CGIL, said yesterday.

To contact the reporter on this story: Chiara Vasarri in Rome at cvasarri@bloomberg.net Andrew Davis in Rome at abdavis@bloomberg.net;

To contact the editor responsible for this story: Angela Cullen at acullen8@bloomberg.net

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