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Monti’s Austerity Debut Risks Rousing Italian Wrath: Euro Credit

Italy's Prime Minister Mario Monti
Italy's prime minister Mario Monti, pauses during a news conference at the Chigi palace in Rome, Italy, on Sunday, Dec. 4, 2011. Photographer: Victor Sokolowicz/Bloomberg

Prime Minister Mario Monti is asking Italians to swallow 30 billion euros ($40 billion) in additional emergency economic measures even as the nation’s fifth recession in the last decade looms next year.

Monti, whose Cabinet approved the package yesterday, is due to present the plan to the legislature at 4 p.m. in Rome, with Parliament voting on it in the coming weeks. The premier has vowed “shared sacrifices” to cut the euro area’s second-biggest debt and regain investor confidence after Italian borrowing costs topped the 7 percent that led Greece, Ireland and Portugal to seek aid. Italy’s 10-year yield declined 73 basis points to 5.95 percent, its biggest drop since Aug. 8 when the European Central Bank started buying the nation’s debt.

“The huge public debt of Italy isn’t the fault of Europe, it’s the fault of Italians,” Monti, who took over last month after former Premier Silvio Berlusconi resigned, told a news conference as he detailed the package yesterday. “Together, we will make it.”

Italian bonds have snapped a seven-week decline amid optimism that European policy makers may take steps to ease the crisis summits this week, with the 10-year yield difference to German bunds down by 119 basis points in the past week to 375 basis points. Italy is still paying the highest rates in more than a decade on its debt, and offered more than 7 percent on new bonds for the third time in a week on Nov. 29.

Road Bumps

Monti’s plan ties pensions to contributions rather than a worker’s last salary, resurrects property taxes and includes a levy on luxury goods. Monti’s task in pushing through Italy’s third austerity package since July may be complicated by a recession next year and road bumps in Parliament and in the streets as protesters rally over a perceived lack of fairness.

“You can’t choke the economy by imposing more taxes to keep paying Mario Draghi’s pension,” Edward Luttwak, a senior associate at the Center for Strategic and International Studies, a policy institute in Washington, said on Sky TG24 on Dec. 1. “Draghi gets a ‘baby pension’ of about 15,000 euros a month from the Italian Treasury” and “only by cutting these ‘golden pensions’ will the government be in a position to be more rigorous with other people’s pensions.”

State Privileges

ECB President Draghi’s early retirement from the Treasury, which he left in 2001, is an example of the privileges enjoyed by officials in the state administration. A spokesman for INPDAP, the public-sector pension agency, declined to comment on Draghi’s pension, which was reported by journalist Mario Giordano in his book “Bloodsuckers: How Golden Pensions Are Bleeding Us Dry.” An ECB spokeswoman didn’t respond by phone or e-mail to questions about the president’s pension today.

Monti, without giving further details, told reporters the new package will eliminate some pension “privileges.” He also said that in solidarity with Italians making sacrifices, he would give up his salary as premier and finance minister.

Draghi had to take a 50 percent pay cut when he joined the ECB from the Bank of Italy, where he earned 757,714 euros last year as governor. That’s five times as much as Federal Reserve Chairman Ben S. Bernanke’s salary. The average monthly gross salary for an Italian is 2,033 euros, according to statistics office Istat.

Legal Perks

“To reduce waste would require intervening decisively on the privileges that thousands of laws guarantee state workers,” author Giordano said in an e-mail. “In Sicily, there’s a law that allows” civil servants “to retire at age 40 with just 20 years of contributions.”

The speakers of both houses of Parliament agreed on Nov. 29 to calculate lawmakers’ pensions based on contributions rather than on their last income. The change takes effect Jan. 1 and mirrors measures in yesterday’s package, which also aligns men and women’s retirement age at 66 starting in 2018 and eliminated the inflation index on all but the lowest pensions.

Monti’s measures were welcomed by Angelino Alfano, the leader of Berlusconi’s party, and also received qualified backing from Democratic Party leader Pier Luigi Bersani.

Unions were less supportive. The plan is “indigestible,” and “we are ready to counter the wrong decisions,” said Susanna Camusso, head of Italy’s biggest union, CGIL. The union called a four-hour strike on Dec. 12 to protest the plan, which is a “massive blow” to workers, Ansa newswire quoted Camusso as saying today.

CGIL led a nationwide general strike against austerity cuts in September and has vowed to take to the streets again if its demands aren’t met. Thirty police and 20 protesters were hurt in a separate Oct. 15 protest in Rome that turned violent.

Plan’s Details

Monti’s package, 10 billion euros of which seek to boost growth, touches on all aspects of society. Items are aimed at shrinking the size of the government, forcing transactions of more than 1,000 euros to be done electronically to fight tax evasion, raising the sales tax by two percentage points, and giving tax breaks to companies to hire young workers and women.

Italy’s economy, whose growth has trailed the EU average for more than decade, will contract 0.4 percent to 0.5 percent next year, Deputy Finance Minister Vittorio Grilli told the news conference. That would be the fifth recession since 2001.

Berlusconi’s People of Liberty party, the biggest in Parliament, said last month it would back Monti, though only to implement austerity measures announced before the former premier resigned on Nov. 12. Berlusconi also said his party opposes any new levy on wealth or high earners. Grilli said yesterday new taxes will mostly affect assets and the wealth.

Early Criticism

The Northern League, a former Berlusconi ally that doesn’t support the new government, and the Italian Values party both criticized Monti’s package after he presented it in Parliament. League member Marco Reguzzoni said the plan “won’t create a single job” in an address to the Chamber of Deputies today.

“If you have a patient who’s critically ill and you need to cure him, you mustn’t kill him,” Italian Values leader Antonio Di Pietro, whose party backed the government in a confidence vote last month, said in an interview. “With these measures, you kill the weakest segments of the population.”

Berlusconi’s party has “strong reserves” about raising property taxes, Fabrizio Cicchitto, the party’s chief whip in the lower house, said today after Monti’s presentation. The new government must call a confidence vote on the plan or Parliament is unlikely to approve it, Berlusconi said today, Ansa newswire reported.

“Parliamentary backing for Monti will fragment as special interest groups seek to defend their positions,” said Stephen Lewis, London-based chief economist at Monument Securities. “It seems likely market confidence will erode in the course of his legislative efforts.”

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