To burnish the credentials of his unelected government, and to show that he would share in the sacrifices imposed on the Italian people, Mr. Monti said he would take no salary as prime minister.
Seated next to Mr. Monti at Sunday night’s press conference in Rome, Elsa Fornero, his welfare minister, was so overcome by emotion in announcing her pension reforms that she broke into tears and had to stop speaking. The photos of her weeping appeared almost immediately on the websites of Italian newspapers, earning her respect throughout the country. “Bless that woman’s heart, she actually has one,” was typical of the comments.
“The package of measures are designed to save Italy,” said Mr. Monti, who replaced Silvio Berlusconi late last month as soaring Italian bond yields thrust Italy into the euro zone debt crisis spotlight. Italy, with €1.9-trillion of debt, is considered too big to bail out.
There is near-universal agreement that the collapse of the Italian bond market, should it come, would wreck the euro and push Europe, and probably North America, into deep recession. Already, the EU is expected to enter a shallow recession next year.
Mr. Monti had come under enormous pressure from Germany and France to launch bold and aggressive austerity and growth-enhancing efforts to reassure the financial markets, which have been losing faith in Italy’s ability to repay its debt. For the EU, the nightmare scenario would be Italian bond yields climbing above 7 per cent – the level that triggered bailouts in Greece, Ireland and Portugal – on the Dec. 8-9 summit in Brussels. If that were to happen, the summit would probably transform itself into a rescue mission for the euro zone’s third-largest economy instead of the rolling out of the German-inspired plan to enforce fiscal unity among the euro zone’s 17 member nations.
Mr. Monti’s budget goal is to raise about €20-billion over three years and balance the budget no later than 2013 and possibly sooner (Italy’s budget deficit is forecast at 4 per cent of gross domestic product in 2012, one of the lowest among the big European countries; its debt-to-GDP, at 120 per cent, is the highest).
An extra €10-billion, taking the whole package to about €30-billion, would be devoted to growth-enhancement measures, of which details were scant. Italy has been a growth laggard since the euro was introduced a dozen years ago. Per capita GDP has been falling.
The plan’s theme was communal sacrifice. The value-added tax, equivalent to Canada’s GST, is to rise for a second time, though not immediately. The property tax on principal residences, which had been eliminated by Mr. Berlusconi, is to be brought back. The pension age for women is to be raised to 62 by 2018, and, for men, to 66.
In an effort to avoid tax evasion, cash transactions above €1,000 are to be banned. A tax on boats, private jets and expensive cars is to be introduced. There will be tax relief for businesses that reinvest profits, and efforts will be made to free up credit for the thousands of small- and medium-sized businesses that are becoming victims of a new credit crunch as Italian banks shy away from making loans.
Income taxes, however, will not rise in Mr. Monti’s austerity plan.
The package will have to be approved by lawmakers in parliament, where Mr. Berlusconi’s Popolo della Liberta is still the most powerful party. Mr. Berlusconi has been quiet in recent days, but has said he favours early elections. “I can neither confirm nor rule out a vote of confidence in this package,” Mr. Monti said.
Mr. Monti’s plan is seen by some economists as grand bargaining ploy with the German government and the European Central Bank, whose policies are heavily influence by Germany's central bank. Last week, ECB president Mario Draghi hinted that the bank might boost its crisis firefighting role if the governments of debt-strapped countries showed greater resolve to fix their own finances.
The ECB has been buying distressed sovereign bonds, including Italy’s, but has been under pressure from Germany to slow the purchases. Aggressive purchase of Italian debt would almost certainly bring their yields down to sustainable levels.
On Monday, German Chancellor Angela Merkel and French President Nicolas Sarkozy are to meet in Paris to hammer out a common stance ahead of the Brussels summit, which probably will present proposals for tight euro-zone governance, to the point that national budgets could be rejected if other countries determined they would push debt loads above certain ceilings.
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Source: Globe&Mail
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