Italy’s Monti Unveils Radical Austerity Measures in Emergency Decree

Italian Prime Minister Mario Monti unveiled an ambitious package of austerity measures on Sunday that relies on both spending cuts and tax increases to reduce the nation’s massive budget deficit and step up economic growth.

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Monti revealed the new measures yesterday in an emergency decree, which means they will take effect before he presents them to Parliament for approval.

The new measures are aimed at showing that Italy is committed to getting its finances in order ahead of a crucial European summit this week. In unveiling the measures on Sunday, Monti said that the fate of Italy and the euro was at stake.

The measures are meant to reduce the cost of government, combat tax invasion, and boost economic growth so Italy can eliminate its budget deficit by 2013. The measures include deeply unpopular moves like raising the country’s retirement age.

The hope is that the measures will take some of the market pressure off Italy, whose borrowing costs have been climbing over the past weeks to levels that have led smaller euro-zone nations to seek bailouts. Once Italy has shown that it is committed to austerity, European leaders can move ahead with broader plans to shore up the euro.

Monti is expected to present the measures to both houses of Parliament on Monday. The measures will face multiple hurdles in the form of labor unions, which are opposing the raising the retirement age; industrialists who say the measures are weighted too heavily toward tax increases that could stifle growth; and politicians in Parliament who are reluctant to push through measures that might hinder their chances for re-election.

Among the measures announced Sunday are sharp cuts to regional governments that could significantly change the business of Italian politics by stemming the flow of patronage spending. Monti also seeks to reintroduce an unpopular property tax that former Prime Minister Silvio Berlusconi abolished in 2008.

The measures would prohibit cash transactions above 1,000 euros in the hope of making tax evasion more difficult; raise the country’s value-added tax by two points to 23 percent starting in September 2013; and give incentives to businesses to hire new workers.

The standard retirement age, now 60 for many women and 65 for most men, would rise to 62 and 66, respectively, with new incentives to keep working until 70. The standard retirement age for women would ultimately rise to match that for men. In the new system, pensions would be based on the number of years of contributions, not on the worker’s salary at the time of retirement, as is common now.

In total, Monti is proposing 30 billion euros in additional emergency economic measures. Monti, whose Cabinet approved the package yesterday, is due to present the plan to the legislature today at 4 p.m. in Rome, and Parliament is expected to vote on the package by Christmas.

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