Italian Senate Passes New Austerity Measures

The Italian Senate (NYSE:EWI) has approved Prime Minister Silvio Berlusconi’s revised €54 billion austerity plan, which is now set to be voted upon by the Chamber of Deputies. The upper house voted 165 to 141 to adopt the measure as protesters outside hurled smoke bombs and firecrackers at the Senate building in a second day of protests and a general strike against the measures.

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The austerity package was announced on August 5 as a means of convincing the European Central Bank to buy Italian bonds after the yield on the 10-year note surged to a euro-era record of 6.4%. Italy is trying to persuade investors that it can handle its debt burden, which is the second-biggest in the euro zone.

While some unpopular measures were dropped from the package, new measures added yesterday to replace them have been wildly unpopular with Italians, tens of thousands of whom joined in a nationwide general strike on Tuesday staged by Italy’s (NYSE:EWI) largest union, CGIL, which claimed the plan unfairly targeted the middle and working classes. The latest austerity measures include a 3% “supertax” for anyone earning €300,000 or more per year, a sales tax increase of 1%, from 20% to 21%, and raising the age of retirement for women to 65. Still the new measures do away with a “solidarity tax” on incomes of €90,000 euros a year or more, and do away with roughly €1.8 billion in cuts to regional governments.

However, while news that the Senate passed the measures, which are also likely to be passed by the lower house, “ECB bond-buying can only offer a palliative cure,” says Nicholas Spiro, who runs Spiro Sovereign Strategy, a London- based consulting firm. “What ultimately matters is confidence in Italian policymaking, and increasingly there’s a feeling that this may require the appointment of a new government.” Bank of Italy Governor Mario Draghi, who is set to become the next ECB president on November 1, has said that the central bank’s bond buying is temporary, and that the purchases “cannot be used to circumvent the fundamental principle of budgetary discipline.”

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Though budget cuts might be a necessary condition of the ECB’s bond-buying program, the bond-buying is only a short-term fix that requires the institution of longer-term measures, like spending cuts, in order to turn an economy around. But Italy’s deficit cuts may not be enough to convince the ECB to continue buying Italian bonds. Italy may have to institute further deficit cuts next month, said the chairman of the Senate Finance Committee, Mario Baldassarri, on Tuesday. “We may need another adjustment in three, four weeks which will be the real answer to the European Commission and to markets,” said Baldassarri, who added that a new plan might include more “spending cuts and non tax increases, structural reforms in terms of liberalization, privatizations, sales of public buildings and so on.”

European Union ETFs to watch on the news include: iShares MSCI Germany Index Fund (NYSE:EWG), iShares MSCI France Index (NYSE:EWQ), iShares MSCI Spain Index (NYSE:EWP), iShares MSCI Sweden Index (NYSE:EWD), iShares MSCI Italy Index (NYSE:EWI), iShares MSCI Belgium Investable Mkt (NYSE:EWK), iShares MSCI Netherlands Investable (NYSE:EWN), iShares MSCI Austria Investable Mkt (NYSE:EWO), iShares MSCI United Kingdom Index (NYSE:EWU).