October 25, 2011

Italian government on the brink as EU plan stalls

USA Today - Markets are looking to the EU's grand plan — promised in time for a leaders' summit on Wednesday — for a turnaround in the debt crisis that will avert a potential global recession.

UPDATE -
Wall Street Journal - The aide to Mr. Bossi said the party leader had reached a preliminary compromise with the government to change Italy's pension system. She didn't elaborate. Asked by reporters if he was still gloomy about the chances of the government surviving disputes over economic reforms demanded by euro-zone leaders, he replied: "I remain pessimistic," according to Reuters.

Mr. Bossi and his top lieutenants have been in marathon talks with Mr. Berlusconi over whether to adopt measures to supplement the government's recent €60 billion ($83.57 billion) austerity package. Germany, France and European Union officials have called on Rome to announce measures aimed at trimming Italy's €1.9 trillion debt and boosting its stagnant growth.

Mr. Berlusconi has responded by pushing his cabinet to approve pension reforms. Italians can retire as early as 58 if they have worked for 40 years, a rule known as seniority. Mr. Berlusconi, however, has floated the idea of setting Italy's retirement age as high 67.

"They're asking us to let people retire at 67 years. To do away with seniority. That's not possible," Mr. Bossi told reporters on Tuesday. If the government changed the pension system, Mr. Bossi added, voters "will slaughter us."

But it risked being delayed, yet again, as governments failed to agree on details. Berlusconi's government, meanwhile, showed little sign of meeting the EU's demands for reforms, a prerequisite for the grand plan to go ahead.

EU officials say they will not present their comprehensive plan if Italy doesn't agree to new economic measures they demanded Sunday. But Berlusconi has so far been unable to get his key ally in parliament, the Northern League, to swallow an increase in pension age. The Northern League says it will alienate their constituency of workers in the productive north.




The European Union wants Italy to raise its standard pension age from 65 to 67, change the legal system to encourage investment and pass other reforms to improve growth. All are measures that have been talked about for years in successive governments, but there has been little political will to see through the unpopular decisions.

Bossi has said the Northern League will not support any increase in the pension age.

But it's a move that partners like Germany view as critical. Germany is raising its pension age to 67 for anyone born after 1964 and Chancellor Angela Merkel will have a hard time explaining to voters at home why Europe's largest economy should be ready to help countries whose workers retire earlier.

Ratings agencies have cited the government's inaction and failure to draft growth measures as reasons for downgrading Italy's growing debt, now €1.9 trillion ($2.64 trillion), nearly 120% of GDP and the second highest in the eurozone after Greece.

Italy's fate is crucial to the eurozone because it is the bloc's third-largest economy and would be too expensive to rescue.

To avoid that scenario, the EU is working on a three-part plan — writing off more of Greece's debt, raising ailing European banks' capital levels so they can deal with those losses on Greek bonds, and boosting the bailout fund's powers.

All three measures need to be agreed together in order to work, but it appeared that agreeing on the Greek writedowns and the bailout fund would take longer than expected.


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