Crucial Italy austerity package enters home stretch

By Philip Pullella

ROME (Reuters) - Italy's often revised 54-billion-euro austerity package enters the final stretch on Monday when cuts aimed at balancing the budget by 2013 go before the lower house of parliament, with approval due later in the week.

The package, which was approved by the Senate last week, goes to the Chamber of Deputies as Economy Minister Giulio Tremonti is preparing to unveil new measures to spur growth.

The programme going to the lower house includes a 1 percent increase in value-added tax, adjustments to pension rules and a special 3 percent levy on incomes over 300,000 euros ($422,000), as well as cuts to government spending.

However, infighting between different factions and clear divisions between Tremonti and Prime Minister Silvio Berlusconi have led to the package being chopped and changed so frequently that its credibility has been badly damaged.

Italy, the euro zone's third largest economy, has moved firmly to the center of the crisis over the past two months as Berlusconi's fractious center-right coalition has dithered over measures to stimulate growth and cut its vast debt pile.

Last week, Italian bond yields, which have been contained by European Central Bank intervention over the past month, spiked sharply after ECB board member Juergen Stark resigned over his opposition to the policy.

The ECB's purchases of Italian bonds has been the only thing preventing Rome's borrowing costs from spiraling out of control as market doubts have grown over whether Italy can keep control of its 1.9-trillion-euro debt pile.

The ECB has demanded that Rome takes urgent action to cut a public debt pile equivalent to 120 percent of gross domestic product, second only to Greece in the euro zone.

In an attempt to show its resolve, the cabinet also signed off on a planned constitutional amendment that would bind governments to running balanced budgets from 2014 onwards unless an exception was sanctioned by a vote in parliament.

But the amendment, which would prevent governments from running a deficit, is largely symbolic for now since it would likely take years to implement.


More imminent are plans by Tremonti to introduce measures to spur growth after the austerity package becomes law.

According to media reports, the plans to spur growth include revenues from auctions for new permits for fourth generation broadband internet and incentives for investments in the south, where unemployment is higher than in the rest of the country.

They also include plans to use more European Union funds to help growth.

The debt crisis has prompted more calls for Berlusconi to step down for the good of the country.

Berlusconi and his top aides rejected both calls, saying the government would remain in office until the end of the legislature as planned.

Berlusconi faces fresh accusations connected with a two-year old prostitution scandal.

Naples magistrates have been investigating allegations that he paid around 750,000 euros to a southern Italian businessman to hush up a prostitution affair dating back to 2009, adding an extra distraction to attempts to address the debt crisis.

He is not accused of any wrongdoing himself in the affair, which magistrates are treating as a case of extortion, but it risks damaging his already battered standing as potentially embarrassing revelations appear in the press.

Berlusconi had been due to be questioned by magistrates as a witness on Tuesday but has informed magistrates he will not be able to make the appointment because he has to go to Brussels for an EU meeting.

(Editing by Karolina Tagaris)