Italy parliament passes austerity package

ROME Fri Jul 15, 2011 7:11pm BST

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ROME (Reuters) - Italy's parliament on Friday gave definitive approval to a 48 billion euro austerity package aimed at averting a full scale financial crisis but there were growing questions about the government's capacity for further reforms.

After what business daily Il Sole 24 Ore called an "absolute first," government and opposition parties set aside differences to pass the austerity measures in a matter of days.

The final vote in the lower house was 314 in favour and 280 against.

A few hours earlier, the government easily cleared a confidence vote called to speed up the package, a mix of spending cuts and tax raising measures.

The rapid political accord helped calm the violent sell off of Italian assets at the start of the week. But in a sign of continuing market nerves, yields on Italian 10-year government bonds climbed to about 5.7 percent and spreads over benchmark German bonds rose above 300 points on Friday.

As market uncertainty continued, Italian media questioned the approach of Prime Minister Silvio Berlusconi, who has not made a public appearance since last week and who has made only one written statement in response to the market panic.

Instead it has been left to President Giorgio Napolitano, an 86-year-old former communist, to shepherd government and opposition parties to an accord which should ensure the government's austerity package is passed.

"The noisy silence of the great communicator," Italy's leading daily newspaper, Corriere della Sera, commented in a front-page editorial.

"Perhaps we will read a long interview from him somewhere today but for the moment, it is a worrying silence," it said.

After several days in which he has not been seen in public, Berlusconi came to parliament for the vote where he met Economy Minister Giulio Tremonti and Umberto Bossi, head of his Northern League coalition allies.

Speaking to supporters in the chamber, he rubbed the back of his neck and grimaced several times as if describing an episode of physical discomfort. One deputy quoted Berlusconi as saying he had slipped in his bath and hit his head.

Apart from an uncharacteristically solemn statement on Tuesday, Berlusconi's last public remarks were in a newspaper interview in which he accused Economy Minister Giulio Tremonti of arrogance and said he was "not a team player."

TECHNICAL GOVERNMENT

The crisis appears to have strengthened Tremonti, a firm proponent of fiscal discipline widely seen as the best guarantor of financial stability, who has piloted the austerity package through to its expected final parliamentary approval.

Speculation has grown that Berlusconi, mired in scandal and fighting four separate trials on corruption and sex charges, may be forced to step down before his term ends in 2013, possibly making way for a so-called "technical government" which could steer Italy into calmer waters.

With a crushing debt burden equal to 120 percent of gross domestic product and chronically weak growth, which has held back efforts to cut back the debt, Italy faces a long, grinding battle to return to economic health.

In its monthly report for July, the Bank of Italy called for further action to consolidate public finances.

But there is uncertainty over the government's capacity to make sensitive reforms in areas such as labour markets to spur growth, and ratings agencies have pointed to doubts on reform implementation as grounds for questioning Italy's credit rating.

"This budget in a sense resumes what Italy's been doing over the past few years. It's good on fiscal consolidation but there is still more to do on the growth side," said Fabio Fois, an economist with Barclays Capital in London.

He said Italy's primary budget surplus, expected to reach 5.2 percent by 2014 would be a strong positive signal to markets but it would not be enough on its own.

"The primary surplus in 2013 and 2014 should help to strengthen the position of Italy, but Italy has to show something more on structural reform to boost real GDP growth," he said.

The opposition has repeated its regular calls for Berlusconi to resign and make way for a broadly based government of technocrats along the lines of the one led in 1995 by Lamberto Dini, a former senior official of the Bank of Italy.

The outlines of what could be such a government have already been seen in the unusually rapid response to the crisis shown by parliament, with opposition parties agreeing not to hinder the austerity package despite objections to many of its elements.

Deputies from both the ruling PDL party and the opposition centre-left say that Napolitano, who as head of state usually stands above daily political affairs, has taken an unusually direct role in coordinating a response to the crisis.

"The Berlusconi government is in hiding but during these hours, it's obvious that there's another government in the country," said one deputy from the government side, who spoke on condition of anonymity.

Berlusconi himself has always rejected any suggestion he may stand down before 2013 and has named Justice Minister Angelino Alfano as his preferred successor as centre-right leader.

That has infuriated his coalition allies in the pro-devolution Northern League party who have made it clear they expect to have a big say in the future of the centre right.

(Additional reporting by Paolo Biondi and Giuseppe Fonte; Editing by Alison Williams)

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