Italy adopts new 45.5-billion-euro austerity plan

ROME, Aug 12, 2011 (AFP) - Italy's cabinet approved a 45.5-billion-euro ($64.8-billion) austerity budget Friday that Prime Minister Silvio Berlusconi said was due to pressure from Finland, Germany and the Netherlands.

AFP - Italy's Prime Minister Silvio Berlusconi (R) and Italy's Finance Minister Giulio Tremonti attend a press conference in Rome on August 12, 2011, ahead of a cabinet meeting called for the adoption of a new austerity programme.

The draft measures -- which must still go before parliament for final approval expected early September -- include a new tax on high earners and deep cuts to local government and cabinet costs.

They seek to assuage jittery markets by returning Italy to a balanced budget in 2013 instead of 2014 as previously planned, and come on top of a 48-billion-euro package agreed in July when Rome first came under pressure.

"It's 20 billion euros in 2012 and 25.5 billion euros in 2013," Berlusconi told reporters after the government meeting.

The premier said the measures were in line with demands from the European Central Bank in return for support given to Italy's bond markets this week.

"This programme goes in the direction of what the ECB recommended," he said.

"After concentrating on Greece, financial speculation was concentrating on our position," Berlusconi said, adding: "In this situation we could not do anything but seek the intervention of the European institution.

"We therefore decided to meet the demands that the institution was making of us in order to justify itself to other European countries, particularly Germany, the Netherlands and Finland, for spending public money," he added.

The 74-year-old centre-right leader said the plan included a five-percent tax for two years on people with an income of between 90,000 euros and 150,000 euros a year, and 10-percent on those earning more than 150,000 euros.

"My heart is bleeding," Berlusconi told reporters, saying the tax went against his promise "never to put my hand into the pockets of Italians."

But he emphasised the measures were necessary in "a dramatic situation."

Italy last week saw panic sell-offs of stocks and bonds that sparked investor worries that the eurozone's third largest economy could be dragged into the same debt spiral as Greece, Ireland and Portugal.

"Faced with an emergency, our country knows how to react," junior finance minister Luigi Casero told TG4 news.

"We will move as quickly as possible. We hope the approval will come at the beginning of September," he said.

But Pier Luigi Bersani, the leader of the main centre-left opposition Democratic Party, said the measures would hurt the working and middle classes, adding: "This austerity programme does not resolve the problem."

A stock rally cleared the air before the government meeting, with the benchmark FTSE Mib index in Milan ending the day up 4.0 percent.

Banks led the rally after the Italian market regulator imposed a temporary ban on short-selling for banking and insurance company stock.

Economists welcomed the measures but cautioned on their effect on growth.

The new austerity programme "goes in the right direction," said Fabio Fois, an analyst with British investment bank Barclays Capital.

But he warned the measures "risk having a negative effect on consumption by slowing down growth next year."

He said that what was needed were "structural reforms to increase the growth potential and offer guarantees on debt reimbursement in the long term."

Italy's growth rate has been at about one percent for a decade and the economy expanded by a sluggish 0.3 percent in the second quarter -- although higher than the 0.1-percent rate in the first three months of the year.

ECB intervention on Italy's debt markets this week has helped drastically reduce the difference between Italian 10-year government bonds and benchmark German bonds -- an indication of greater investor confidence.

Italy is burdened by one of the highest public debts in the world -- equivalent to about 120 percent of gross domestic product (GDP).

Finance Minister Giulio Tremonti said the measures would reduce the budget deficit to 1.4 percent of output by 2012, and to zero by 2013.

Asked whether he was concerned the new austerity measures could hurt Italy's growth prospects, he answered: "We do not have any alternative."

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