Mario Monti pledged urgent action to curb the region’s second-biggest debt in his debut as premier, saying Italy’s ability to shore up its finances is critical to the survival of the euro.
“The future of the euro also depends on what Italy does,” Monti said in an address to the Senate in Rome today as he presented his government’s program. “We have to show that we have taken the path to reducing the relationship between debt and GDP that has returned to the level of 20 years ago.”
The new government will first focus on implementing austerity measures passed by former Prime Minister Silvio Berlusconi’s administration that aimed to balance the budget in 2013, he said. Then Monti will take additional steps that may include reinstating property taxes, overhauling the tax system, changing pension rules, trimming the size of the government and modifying labor laws, he said.
The yield on Italy’s 10-year bond declined during Monti’s speech, falling below the 7 percent threshold that led Greece, Portugal and Ireland to seek European Union aid. It was at 6.84 percent as of 5:20 p.m. in Rome, after rising as high 7.13 percent before Monti’s speech. That helped reduce the difference over German bunds, Europe’s benchmark, to 495 basis points from 519 yesterday.
Fitch Ratings said in a statement today that Italy’s credit rating could be cut to a low investment grade if the nation loses market access. Still, it said it’s opinion is that the new government “will prove itself to be credible in pursuing fiscal and structural economic reform.”
Italy’s main political parties have agreed to back Monti’s technocratic government in confidence votes today and tomorrow, though the breadth of his new program will test that support going forward.
Monti pledged to lead a “government of national commitment” that would promote “rigor,” revamp growth and work for fairness in applying reforms.
The new government will also consider an overhaul of the current tax system to make it “more favourable to growth”, he said. Payroll taxes discourage employers from hiring, while Italy’s lack of a tax on primary residences is “a peculiarity, if not an anomaly” in Europe, he said.
“The reference to the taxation of properties is the most difficult to accept and the most worrisome part of the speech,” said Gaetano Quagliarello, a senior lawmaker in Berlusconi’s People of Liberty Party.
Monti said that if Italy doesn’t find the necessary “unity of purpose,” the “spontaneous evolution of the financial crisis will subject us all, above all the weakest part of the population, to far harsher conditions.”
He also said another priority is combatting tax evasion and black market labor, adding he will consider lower tax rates for women to encourage them to join the workforce.
Italy should commit to “ambitious” targets to reduce its debt, “but we won’t be credible if we don’t start to grow,” Monti said.
“Monti’s Senate address is the best speech I have ever heard from an Italian prime minister-designate,” Riccardo Barbieri, London-based chief European economist at Mizuho International Plc, said in an e-mail. “Italian market participants must be trying to contain their excitement and reminding themselves that this is only happening because we are on the edge of the abyss.”
The Senate holds its confidence vote to install Monti’s government starting at 8 p.m. The Chamber of Deputies will hold the final confidence ballot tomorrow beginning at 2 p.m.
In his 40-minute presentation, Monti said that restoring economic growth would be key to reducing debt and the government will pay particular attention to ensuring measures to spur the expansion didn’t impact the poorest Italians. He said his ministers would be giving more specifics on the plans going forward.
Monti, a senator-for-life with no other members of parliament in his Cabinet, was sworn in yesterday after spending two days lobbying parties for their support. Almost all political formations agreed to back his government, even as plans to overhaul pension spending, labor rules and reinstate property taxes are likely to rile parties across the spectrum.
“Monti will try to present the plans of his government with the ‘coupling technique,’ simultaneously announcing measures that will make both of the main parties unhappy,” said Roberto d’Alimonte, professor of politics at Luiss University in Rome. They may be “the reintroduction of the main property tax which Berlusconi’s party doesn’t want and some new legislation on the pension system and the labor market which the Democratic Party or some of its lawmakers oppose.”
Berlusconi’s party said it will vote for the Monti government, though that support was limited to backing the implementation of austerity measures announced by Berlusconi before he resigned on Nov. 12. Monti is also considering introducing a wealth tax, another measure opposed by Berlusconi, newspapers including Corriere della Sera have reported.
In the 321-seat Senate, Monti can likely rely on 297 votes, based on the parties that announced support in consultations. In the lower house, where he faces the final confidence vote, he is expected to have at least 560 votes out of 630.
Monti’s success will hinge on maintaining that backing once he begins delivering austerity measures. In both chambers, he will face opposition from Berlusconi’s key ally, the Northern League, which didn’t show up for their scheduled consultations with Monti on Nov. 14.
The new premier’s team “is a well-intentioned government with ambitious hopes vested in it,” Nicholas Spiro, managing director of Spiro Sovereign Strategy in London, said in an e- mail. “It remains to be seen whether its apolitical character becomes an asset or a liability.”
Monti signaled his commitment to playing a central role in driving economic policy by keeping the portfolio of finance minister for himself. He also named Corrado Passera, chief executive officer of Intesa Sanpaolo SpA, as his economic development minister.
Italy, the euro region’s third-biggest economy, is trying to tame a debt of 1.9 trillion euros ($2.6 trillion), more than Spain, Greece, Portugal and Ireland combined. The jump in bond yields is already raising borrowing costs, with the Treasury forced to offer a yield of 6.29 percent, the highest since 1997, on five-year bonds at an auction on Nov. 14.
“Next year we have to sell 440 billion euros” in debt, Maria Cannata, the Treasury’s director of public debt, said at a conference in Milan yesterday. “It sounds prohibitive but it’s not, even if things have gotten more complicated because investors are frightened by the volatility in markets.”
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