Berlusconi says Italians must make sacrifices to restore credibility to euro

By Frances Demilio, AP
Thursday, May 27, 2010

Italy makes cuts to dodge euro crisis

ROME — Italian Premier Silvio Berlusconi said Wednesday that euro24 billion (nearly $30 billion) in budget cuts aimed largely at its bloated bureaucracy are essential to restore confidence in the euro and to stop Italy living beyond its means.

Berlusconi’s government bowed to market concerns about his country’s high debt load and bloated public sector, springing the cuts on an unsuspecting public just weeks after ruling out painful measures. But Berlusconi said “this crisis is like no other,” mandating significant and coordinated austerity measures.

While being careful to call the principles of social welfare valid, the premier also indicated they were hurting Italy — echoing criticism by some economists who see Europe’s generous benefits, especially pension systems, as hampering growth and innovation.

“In this way, Italy’s social spending has gone out of control and has transformed itself into subsidy spending. This irresponsible system worked as long as it was able to resort to devaluing currency, and as long as you could raise taxes,” Berlusconi said.

But he said the rules binding 16 countries together into the currency union and the recent crisis requiring a reduction in public debt no long allow these solutions.

Flanking him at a news conference to defend the budget cuts was Economy Minister Giulio Tremonti, who noted wryly that the expression “cradle to grave” social benefits has a particular meaning for Italy.

“Italy has few cradles and few graves” these days, Tremonti said, referring to Italy’s low birthrate and long longevity.

These demographics combine to mean relatively few young workers pay into a system to provide ample pensions and national health care to parents and grandparents who retired as young as their mid-50s and live for decades more.

Berlusconi and his top aides until recently insisted that Italy would be able to avoid a crisis without sacrifices. But the government reversed course this week — emphasizing cuts to the overblown, stodgy bureaucracy and pledging to fight tax evasion, a major drain on state coffers.

The measures must be passed by Parliament, and will face some public opposition with Italy’s largest union pledging both demonstrations and a general strike next month.

The measures would trim Italy’s deficit from 5.3 percent of economic output in 2009 to 2.7 percent by 2012 and reassure investors that Italy can handle its heavy debt load, which tops 115 percent of gross domestic product.

Italy’s debt is nearly twice the limit of 60 percent imposed by EU rules, which have not been strictly enforced. But so far it has largely been spared the troubles of other heavily indebted countries such as Greece, Spain and Portugal, which have seen borrowing costs rise due to fears of default. Greece was shut out of borrowing markets and needed a bailout to avoid bankruptcy.

Italian stocks rose on Wednesday, with the benchmark index up 2.2 percent on the day, mirroring an upward sweep of European indexes regaining some of this week’s loses.

European Union leaders responded to the spiraling debt crisis with a $1 trillion loan backstop for struggling governments. But it buoyed the markets for only days, and continuing fears of a wider debt crisis forced Italy’s hand to join Spain, Portugal, Greece and Ireland in announcing cutbacks aimed at supporting market confidence.

Governments are seeking to boost investor confidence in their sovereign debt to keep the price of borrowing low, and avoid being pushed to near-default like Greece. They also want to support the euro, trading Wednesday at $1.23, down from $1.51 late last year.

“It is very difficult to stop the slide until they can convince people that they can turn the economies on Europe’s periphery to growth,” said Barcelona-based independent economist Edward Hugh.

IHS Global Insight analyst Raj Badiani called the Italian measures “an encouraging first step.”

“However, we feel this should be a forerunner of a prolonged period of better fiscal management. Italy needs to break its protracted cycle of modest growth and high debt. Otherwise it will remain vulnerable to future external shocks,” Badiani said in a note.

In other words: cuts are not enough. Italy will only get its debt down, he said, by “implementing structural reforms to bolster Italy’s sustainable growth potential in conjunction with stronger fiscal discipline. “

The government is seeking to redouble its fight against tax evasion, which costs the state an estimated euro120 billion, with the black economy estimated at 22.2 percent of GDP, second only to Greece’s.

The strategy includes a three-year wage freeze for public workers and pay cuts for highly paid civil servants and Cabinet minister.

Berlusconi emphasized the pension system wouldn’t be tampered with, but that workers would be asked to delay retirements by “several months.”

Berlusconi said that public workers need to make the biggest sacrifices because of the job security they enjoy.

“To defend the euro means to safeguard Italy’s future, the well-being of 60 million men and women and 5 million businesses,” Berlusconi said.

The measures also would do away with some provincial governments, lightening Italy’s substantial bureaucracy.

AP writer Colleen Barry reported from Milan.

will not be displayed