Italy: New government, old problems

Italian Prime Minister Silvio Berlusconi is making final preparations to say “arrivederci,” but even as Italy prepares to form an emergency government, doubts remain that a new captain will manage to steer the Italian mega-yacht to a safe haven.

Italy is rushing through painful austerity cuts aimed at averting a worst-case scenario in the eurozone's third-largest economy. The upper house adopted a package of austerity measures on Friday by a vote of 156 to 12. The package will now by sent to the lower house, which will vote during a special session at the weekend.Approval by both houses of parliament will finally end the era of Silvio Berlusconi, who has promised to resign as soon as new laws are passed.President Giorgio Napolitano is expected to ask former European Commissioner Mario Monti – who he recently made a senator for life – to form an emergency government.There are hopes that the government of technocrats under Montis leadership will send a clear message that Italy is dead set on bringing its massive debt burden, which stands at 120 per cent of GDP, under control.  While markets were calmed by news that the formation of an interim government would avert a three-month wait for potentially chaotic elections, doubts continue to linger.Investors continue to question whether a new government will have any more luck pushing through long-promised financial reforms that have thus far failed to materialize.  The euro has firmed up, but investors doubt whether it will climb far, given that even a technocrat Italian government might struggle to make progress on long-promised, never-delivered fiscal reforms."The most important element to overcome this crisis is a very trusted and able new Italian government that can really fulfill the structural changes that are needed," ECB policymaker Ewald Nowotny told Reuters in Beijing.However, the package of austerity cuts, which aims to net close to 60 billion euros in savings for Italy, is likely to face massive public resistance.    Among the most unpopular measures will be a freeze on public sector salaries until 2014.  Another likely to gain few friends is a phased-in rise in the retirement age for women in the private sector, which will increase from 60 in 2014 to 65 by 2026.There are also plans to increase the VAT from 20 to 21 per cent, a special tax on the energy sector, and measures to fight tax evasion which will see a 2,500 euro limit on cash transactions.  Ultimately, the ability of the emergency government to steer Italy away from a meltdown is really a test for the European project itself.  For now, it remains to be seen if the ideals of a peaceful and culturally-united Europe can survive, or if a failure to adapt and deliver decisive leadership during these troubled economic times will leave those ideals in ruins.