Italy’s Monti Defends New Austerity Measures

The prime minister warns that “the survival of the common currency” could be at risk if Italy doesn’t reform.

Italy’s prime minister Mario Monti defended a new austerity package in parliament on Monday. He said that his cabinet of technocrats was prepared “to do what it has to do but Europe must not fail to do its part.”

Monti, who assumed the premiership after Silvio Berlusconi resigned last month, referred to a comprehensive European fiscal reform effort that is spearheaded by Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France who met in Paris the same day.

In Rome, Monti welcomed Dutch prime minister Mark Rutte who heralded his plans for fiscal consolidation as “impressive.”

The recently installed Italian government, which enjoys broad parliamentary support, aims to raise more than €10 billion in additional property taxes, imposes a levy on luxury goods and increases the value-added tax rate by 2 percent. It also intends to crack down on tax evasion which is deemed pervasive in Italy.

Another €20 billion should be cut in spending with an increase in the retirement age, which was blocked in the Berlusconi cabinet by the separatist Lega Nord, among the most significant of budget reforms. The party which seeks autonomy for the richer north of Italy is the only one represented in parliament that doesn’t support the Monti government.

Union leaders were critical of the move to raise the pension age but the left-wing opposition approved of it. The prime minister warned lawmakers that if they didn’t prove capable of “reversing the negative spiral of growth in debt and restoring confidence to international markets, there would be dramatic consequences, which could go as far as putting the survival of the common currency at risk.”

Monti, an economist who was a European commissioner between 1995 and 2004, had been under pressure from markets and other European countries to come up with a credible plan of reform and diminish the specter of Italy defaulting on its debt obligations.

Investors on Monday reacted favorably to his austerity pledges. The yield on Italian sovereign bonds plunged and stock market indices shot up.

With a €1.9 trillion debt, the equivalent of 120 percent of its gross domestic product, Italy’s ability to borrow at an affordable rate on financial markets is critical. Its economy is too big to bail out and its borrowing costs were too high to be sustained in the long term.

Eventually, revived economic expansion is the way out of Italy’s debt spiral. To that end, Monti included tax breaks in his austerity package, measures to promote infrastructure development and a liberalization of shop opening hours. No growth is expected for the next two years however. The Italian state remains a mammoth institution despite the scrapping of a number of public bodies and the reduction of provincial administrations. Government spending equals almost half of GDP. Large energy and transportation companies will remain the property of the state.

Due to the complexity of the regulatory framework and the high cost of conducting business, a considerable amount of economic activity is estimated to be taking place in the informal sector. Especially in the more rural south of Italy, corruption is endemic and enterprise stifled.