austerity plan

Italy’s Government Approves Austerity Plan Ahead Of European Summit

The Italian government approved a three-year austerity plan late Sunday, ahead of a crucial week for European leaders’ campaign to save the euro zone from collapse. “This is essential to reinforce the credibility on the Italian economy but also to regain control on the very high debt and alleviate the burden on future generations of Italians,” Vice President of the European Commission, Olli Rehn, said in a statement late Sunday. Rehn said the package, which contains spending cuts, tax hikes and pension reforms, “is crucial to keep the momentum in economic reform and in the political renewal.”

Italian Prime Minister Mario Monti, in his first big test since taking office two weeks ago, outlined a three-year plan made up of €30 billion ($39.3bn) in tax increases, spending cuts, pension overhauls and growth measures. The package, equivalent to 1.9% of Italy’s €1.6 trillion gross domestic product, will probably be followed by French-German proposals to create a new vehicle for budget policies in the euro-zone that European leaders could adopt at a summit on Thursday and Friday.

The unraveling of Italy’s bond market, one of the world’s biggest, has become the biggest single threat to the survival of the euro. If Italy is unable to refinance its huge debts in the coming year, the rest of Europe would face the challenge of trying to prop up the ailing economy along with the IMF. Most analysts believe the task would be herculean and just would not work.

“On the whole, considering that Monti’s cabinet has been in place for 18 days or so, this package amounts to a valid and rapid first step in the right direction,” said Vladimir Pillonca, an economist with Societe Generale.

German Chancellor Angela Merkel visits French President Nicolas Sarkozy in Paris on Monday to finalize a common Franco-German line ahead of the EU summit later in the week, when EU President Herman Van Rompuy is expected to present proposals for amending the EU treaty to allow stricter euro-zone governance.

US Treasury Secretary Timothy Geithner will be among those attending some of the other talks among European leaders this week, in a sign of the growing fears in Washington that the euro-zone crisis could batter a fragile global economy. Many analysts believe the next five days could be a “make-or-break” week for the euro.

Euro Continues its Gains After Greece Passes Austerity Plan

The euro continues its gains today after the Greek Parliament approves new austerity plan. The approval of these new austerity measures allows Greece to receive more aid. As the vote was being passed, Greek police clashed with protesters in central Athens. The people of Greece disagree with these new austerity measures because of the major effects it has on them, such as even lower public sector wages. These new austerity measures does not mean Greece still won’t default, it just does not look as dire as it did yesterday. They still have a long road ahead of them.

The euro gained 0.36% against the dollar, 0.07% against the yen, and 0.77% against the franc. Over the past week, the euro has recovered over 1.5% erasing most of the month’s loss. The U.S. dollar has been under pressure after weak economic data this month. The DXY is down 0.44% today.

Overall, the euro continues to gain ground against the other major currencies after the Greek vote. Now that the Greece has passed these new austerity measures, it takes some pressure off all the markets and we should see less volatile trading in the near future.

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