Finance Minister Giulio Tremonti said Italy will seek to ease labor market laws, sell local services and possibly raise the capital-gains tax to balance its budget and secure European Central Bank support for its bonds.
Italy must “overcome its rigid, centralized system,” Tremonti said today in testimony today before bicameral committees of Parliament in Rome. “This is a choice that marks the end of an era in which the West could sell government bonds at preferred rates.” Tremonti and Berlusconi yesterday said the new measures would be approved by the Cabinet by Aug. 18.
The new measures and the plan to balance the budget in 2013 are part of an effort to convince investors that Italy can tame the region’s second-biggest debt and maintain ECB support in bringing down the country’s borrowing costs, which reached a euro-era high last week. The ECB began buying Italian debt on Aug. 8 after the government pledged the deficit cuts, helping trim on Italy’s 10-year bond yield 104 basis points in four days.
ECB President Jean-Claude Trichet sent a letter to the government last week that called on Italy to possibly lower the wages of public-sector employees, liberalize laws on firing workers, accelerate plans to balance the budget and sell off local state-owned service companies, Tremonti said. The full contents of the letter remain “confidential,” he added. The letter prompted Berlusconi to pledge Aug. 5 to speed the budget adjustments, prompting the ECB bond purchases.
Tremonti said the government is studying ways to carry out Trichet’s requests, and may also raise the capital-gains tax rate to 20 percent from the current 12.5 percent, excluding government securities. Hiring and firing practices also need to be eased, he said. He also said there were no plans to cut the wages of public workers.
“We note with bitterness that we are taking requests from the ECB,” Pier Luigi Bersani, leader of the main opposition Democratic Party, said during today’s session. “It’s not something I like to see for the seventh-biggest industrial power in the world, but that’s what we’ve been reduced to.”
Tremonti also raised today the possibility of a “solidarity contribution,” to help ease government finances, without giving details.
Allies were quick to say that he wasn’t referring to a wealth tax that has been called for by unions. “There isn’t any room for a wealth tax and I don’t think that was the minister’s intention,” said Maurizio Gasparri, the head of the ruling People of Liberty Party’s delegation in the Senate.
Tremonti and Berlusconi will present the plan to Italian President Giorgio Napolitano tonight, paving the way for the Cabinet to vote on it as soon as tomorrow. Berlusconi met with Bank of Italy Governor Mario Draghi today to discuss the measures.
Tremonti’s testimony comes after he and Prime Minister Silvio Berlusconi discussed the proposals last night with business leaders and unions, the biggest of which threatened a general strike if it deems that the government is seeking to balance the budget on the backs of workers.
With the new austerity package, Italy aims to reduce the shortfall next year to between 1.5 percent and 1.7 percent of gross domestic product before eliminating it in 2013. The government plans to further accelerate an increase in the retirement age and may consider cuts to health-care spending, Italian newspapers including la Repubblica have reported. Tremonti didn’t give details of those moves today.
“If the measures that end up in the budget adjustment are those that have been circulated in the newspapers and that the government hasn’t denied, the only response will be a general strike,” Susanna Camusso, head of Italy’s biggest federation of unions, the CGIL, said after yesterday’s talks.
Tremonti’s testimony comes a day after the country’s benchmark stock index plunged 6.7 percent, with UniCredit SpA and Intesa Sanpaolo SpA, the country’s biggest banks, falling 9.4 percent and 13.7 percent respectively on concern that Italy may become the next victim of the region’s debt crisis.
Italy’s benchmark FTSE MIB Index gained 3.3 percent to 15,153.22 at 4:45 p.m. in Milan. UniCredit gained 3.5 percent while Intesa advanced 6.5 percent.
The new measures supplement a 48 billion-euro ($68 billion) austerity package announced last month, when the government also pledged to overhaul the tax system and raise the retirement age. The plan failed to convince investors that the government could control a debt set to reach 120 percent of GDP this year, and the yield on the country’s 10-year bond surged to 6.2 percent last week, the highest in more than a decade.
Raffaele Bonanni, head of the smaller CISL union, said a strike would be counterproductive. “What we need today is cohesion as the house is burning,” he said yesterday.