Italian Cabinet approves €24 billion ($30 billion) in cuts necessary to avoid Greek tragedy

Italian gov’t approves €24 billion in budget cuts

MILAN — Premier Silvio Berlusconi’s ministers on Tuesday approved €24 billion ($30 billion) in budget cuts for the 2011-2012 period aimed at protecting the country from the sort of market speculation that pushed Greece to the brink of bankruptcy.

The measures seek to reduce the budget deficit to below 3 percent of GDP by 2012, down from 5.3 percent in 2009. The government said in a statement that the measures focused on reducing public spending for both Italy’s highly paid politicians and public administration as well as on fighting tax evasion, a major revenue drain.

Premier Silvio Berlusconi and Finance Minister Giulio Tremonti were scheduled to hold a news conference Wednesday afternoon to detail the measures.

They call for a three-year wage freeze for public workers and pay cuts for highly paid public servants, the statement said. There also are measures to reduce bureaucracy, help the underdeveloped south and crackdown on those falsely receiving disability benefits.

All the measures must be passed by Parliament, where there could be political fights waged. The head of the powerful CGIL union Guglielmo Epifani said earlier Tuesday that the cuts focus too much on workers.

Italy’s measures are among cuts under way across Europe as the continent tries to convince markets that it can manage its debt load and avoid another near-default like Greece’s. The cuts would bring Italy’s budget deficit to below 3 percent of gross domestic product by 2012, from 5.3 percent in 2009. And they would bring the deficit in line with the treaty governing the euro zone and soothe markets worried about the debt load of 115 percent of GDP — the highest of the 16 countries that use the euro.

In Spain, billions in cuts to civil servants’ salaries go into effect next month, and the Socialist government has frozen some retirement pensions starting next year, eliminating cost of living increases. France is raising the retirement age and Portugal is hiking taxes from June 1, among other measures.

Germany will decide next month just how to cut at least €3 billion ($3.75 billion) from the budget, including possible fresh cuts to once-sacred unemployment benefits.

On Monday, Britain, which is not part of the euro zone, unveiled 6 billion pounds ($8.6 billion) in cuts — mostly to government payrolls and expenses.

Despite the crisis, Italy has had no trouble covering its bond issues, even if its spreads — the difference between its bond yields and the equivalent German benchmarks — have risen to 1.2 percentage points from a recent low of 0.2 to 0.3 points.

Tremonti was meeting with local officials Tuesday to outline the measures and seek their cooperation.

Gianni Letta, one of Berlusconi’s most-trusted aides, on Monday evening stressed the importance of the measures.

“We are forced to make very heavy and difficult sacrifices, I hope in a provisional way, to save our country from the Greek risk,” Letta said in L’Aquila, according to the news agency ANSA.

Italian consumer confidence deteriorated in May, and is expected to remain weak in the next few months as households prepare themselves for the painful austerity measures, Raj Badiani of IHS Global Insight said in a note.

From a sovereign debt perspective, Badiani said that Italy is still deemed less risky than Greece, Portugal or Spain, because investors are accustomed to Italy’s high debt level and the Italian banking sector appears to be sound with a higher dependence on retail deposits than in other countries.

“Italy appears to be less vulnerable in the near term than other Club Med economies, but its protracted cycle of modest growth and high debt needs to be broken in the medium term,” Badiani said.

The impending cuts are catching many Italians off-guard, after having been assured as recently as early April by both Berlusconi and Tremonti that Italy would be able to exit the crisis without drastic measures.

“I am worried because since the euro has come into being my pension has been cut in half and now I am afraid to be penalized also by this crisis,” said Giannina Di Matteo, a 68-year-old retiree in Rome’s historic center.