Italy’s largest unions unhappy with €24 billion in cuts aimed at avoiding Greek tragedy

Italian makes cuts to dodge crisis

ROME — Italian Prime Minister Silvio Berlusconi has bowed to market concerns about his country’s high debt load and bloated public sector, springing €24 billion in spending cuts on an unsuspecting public just weeks after ruling out painful measures.

But unpopular austerity may not be enough to keep markets soothed — and keep Italy from falling victim to Europe’s government debt crisis — if the government doesn’t make deeper structural changes that stimulate growth, analysts say.

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 bureacracy and pledging to fight tax evasion, a major drain on state coffers.

Berlusconi and Finance Minister Giulio Tremonti were expected to outline the measures in a press conference later Wednesday. Parliament’s approval is needed.

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

Italy’s debt is the highest in the euro zone, 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 spiralling 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 measures have reportedly raised tensions among the ministers, with Berlusconi and Tremonti at odds. And Italy’s largest union was gearing up to for a fight on the grounds that workers are taking the hardest hit, and that the measures do little to stimulate growth.

Guglielmo Epifani, leader of the CGIL labor confederation, said unions were considering general strikes.

“I would have expected fair cuts, but it seems to me we aren’t there: The cuts are all concentrated on workers, the same old recipe that leaves out high earners, while there seems to be little on the stimulus front,” Epifani was quoted by the Turin daily La Stampa as saying.

Italian media reported that the government sought to recoup €7 billion in unpaid taxes in the first year alone, and intended to offer local administrations a cut of 33 percent for their help in tracking down scofflaws. The measures also would do away with some provincial governments, lightening Italy’s substantial bureacracy.

The cuts also call for a three-year wage freeze for public workers and pay cuts for highly paid civil servants and cabinet minister. There also are measures to delay the start of pension benefits and crack down on those falsely receiving disability benefits.

“What we did last night is a change of direction,” Berlusconi’s public administration minister, Renato Brunetta, said on Sky Italia. “Enough uncontrolled costs of the state.”