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Italian austerity

August 13, 2011

The Italian cabinet has adopted a tough new austerity package, including tax hikes and cuts to local government, to reduce the deficit. Prime Minister Silvio Berlusconi said the measures were painful but unavoidable.

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Italian Premier Silvio Berlusconi with Finance Minister Tremonti
Berlusconi, right, said his heart "drips with blood" over the painful measuresImage: AP

Italy's center-right government announced Friday drastic austerity measures, including tax increases and spending cuts, to try to tackle its huge public debt and balance its budget by 2013 - a year earlier than planned.

After an emergency cabinet meeting, Prime Minister Silvio Berlusconi announced a savings package worth over 45 billion euros ($64 billion), spread out over the next two years.

The measures range from a special levy on incomes above 90,000 euros to higher taxes on income from financial investments and cuts in the cost of government, notably through a cull in the number of local politicians.

German Chancellor Angela Merkel and European Central Bank (ECB) head Jean-Claude Trichet "strongly appreciated" Italy's latest austerity budget, Berlusconi said Saturday.

The Italian prime minister told the news agency Ansa he had spoken to both the German leader and Trichet.

The new measures come on top of a previous round of spending cuts announced in July which aimed to balance the budget by 2014.

The new measures take effect once they are approved by the president of Italy. They must also be approved by parliament, which can also make modifications, within 60 days

'Bleeding hearts'

Berlusconi said he agreed to the tax increases only reluctantly and the decision made his "heart drip blood."

"Our hearts are bleeding. This government had bragged that it never put its hands in the pockets of Italians but the world situation changed," Berlusconi said. "We are facing the biggest global challenge."

"We are personally very pained to have to adopt these measures," he told reporters after the cabinet approved the plan, which had been demanded by the European Central Bank as a condition for buying Italian bonds.

Earlier this week, the European Central Bank announced it would buy Italian debt in a effort to lower its cost of borrowing.

"This program goes in the direction of what the ECB recommended," Berlusconi added. "After concentrating on Greece, financial speculation was concentrating on our position. In this situation we could not do anything but seek the intervention of the European institution.

"We therefore decided to meet the demands that the institution was making of us in order to justify itself to other European countries, particularly Germany, the Netherlands and Finland, for spending public money," he said.

Creaking economy

The country's borrowing costs shot up recently after investors sold off Italian bonds because of worries over the health of the eurozone's third-largest economy.

Overall confidence in the 17-member single currency bloc has been weakened of late, with its periphery economies - Greece, Ireland and Portugal - all straining under unsustainable levels of debt. Italy's debt overshadows all other eurozone partners.

Prior to the announcement, Italian unions had pledged to oppose measures that would hurt ordinary workers, including pensioners.

An anti-austerity march in Rome
Austerity measures have not gone down well with Italian workersImage: picture alliance/dpa

"The tax hikes certainly won't help the economy, which is already stagnating, and consumer confidence is sure to fall further," Raj Badiani, an economist at IHS Global Insight, told news agency Reuters.

"The new fiscal measures appear to be credible, but the real problem is on the reform front. We need a timeline for measures to liberalize the service sector and labor markets."

Author: Darren Mara (Reuters, AFP)
Editor: Sonia Phalnikar