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.