Italian Government Divided Over Budget Cuts

Silvio Berlusconi’s coalition partners are opposed to the reforms other European leaders demand.

The ruling coalition in Italy is divided over the need to implement further budget cuts. Whereas Prime Minister Silvio Berlusconi promised to deliver additional austerity measures this weekend to stave off the specter of Europe’s debt crisis reaching Italy’s shores, his partners in the separatist Lega Nord are critical.

Other European leaders pressed Berlusconi at a Brussels summit on Sunday. They fear that unless Italy shores up its public finances, the continent’s spiraling debt crisis could drag the eurozone’s third largest economy down with it and imperil the future of the entire currency union.

Italy’s national debt amounts to more than 120 percent of its economy which is far less competitive than Germany’s. Cronyism, corruption and rigid labor laws constitute major impediments to growth and exacerbate an imbalance that has traditionally existed between the industrialized north of the country and the agricultural and poorer south.

The Lega Nord, which seeks autonomy for the north, is adamantly opposed to entitlement reforms which should help improve Italy’s fiscal projections in the long term. Raising the retirement age from 65 to 67 is unpopular although many Italians enjoy a length of service pension which enables them to retire ahead of the legally mandated age.

Lega Nord‘s support is critical for Berlusconi’s conservative administration which has been beset by corruption scandals and infighting. Although he secured a narrow majority in a recent confidence vote, the prime minister and former media tycoon operates under severe scrutiny from parliament.

Italy has tried to calm markets with austerity measures since the European Central Bank had to intervene and finance Italian sovereign debt this summer but under pressure from the Lega Nord, €5 worth of cuts to local government funding was canceled in September. Most of the €48 billion in previously planned spending reductions won’t come into effect until after 2013’s parliamentary election.

Due to its sheer size, its conservative banking sector and high level of personal savings, Italy faces no immediate threat of default but if there is a crisis of confidence, the country’s divided government can only deepen and prolong it.