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Wednesday, August 10, 2011

When 'More Austerity' Is Easier Said Than Done

Regular readers might have noted that we've become somewhat Italy-obsessed of late. Well, we have good reasons. The fate of the Single Currency largely depends on whether the 'Bel Paese' can get out of the woods.

Following last week’s announcement that the Italian government will aim to achieve its zero deficit target by 2013 instead of 2014, Berlusconi & co. now need to find around €20 billion a year earlier than expected - not pocket change. Unfortunately, the Italian government is split on where, exactly, the money should come from.

In fact, Italian media reports that the government is considering more cuts and reforms to pensions. In particular, the gradual increase in the retirement age for women working in the private sector could be brought forward to next year rather than 2020, and plans to raise the retirement age in line with life expectancy could also be implemented a year earlier.

Berlusconi will discuss the new austerity measures with Italian trade unions and employers' organisations this afternoon. Hardly surprising, unions will put up resistance. But more worrying is that Lega Nord leader Umberto Bossi (in the picture with Il Cavaliere) - Berlusconi's junior coalition partner - said yesterday that he will not accept further adjustments to Italy's pension system.

As an alternative, Lega Nord (reportedly with the support of Italian Economy Minister Giulio Tremonti) is now pushing for new taxes on capitals and properties. Berlusconi is widely quoted in the Italian press saying,
"It won't be a government led by me that imposes a property tax. I'd rather resign."
Yeah, right.

These guys'd better get their act together. Despite the temporary relief offered by the ECB's bond-buying, the markets expect that Rome takes action. If the Italian government doesn't offer some clear evidence that it can deliver on what it's promised, the distance between Rome and Athens will soon appear dangerously narrow.

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