ECB, others frustrated by Italy austerity waffling

September 2, 2011 - 1:20 PM

ROME (AP) — The European Central Bank, Italy's main industrial lobby and even the Vatican voiced increasing concern Friday over Italy's waffling on its austerity proposal, which has been changing almost daily to placate various interests.

ECB chief Jean-Claude Trichet said in an interview with Il Sole 24 Ore newspaper that the euro45.5 billion ($65.8 billion) legislative package of spending cuts and tax increases was of "extreme importance" and urged Italy to carry through with it.

The government, which introduced the measures Aug. 5, has been changing the proposals amid protests and internal squabbling within Premier Silvio Berlusconi's coalition. Already, the government has scrapped a tax on high earners, though it was kept for public officials, and cutbacks for town governments.

To make up for the losses, the latest revision announced Thursday involves among other things a greater crackdown on tax evasion, including jail time for anyone caught evading taxes of more than euro3 million and online publication of taxpayers' income.

That proposal sparked heated criticism Friday from industrial group Confindustria, which said that while it has long championed cracking down on Italy's notorious tax cheats, the government's amendment was sloppy, "incoherent" and inefficient.

In a statement, Confindustria said it was "greatly concerned by the way in which Italy's serious public finance situation and economic regrowth are being confronted."

Even the Vatican No. 2, Cardinal Tarcisio Bertone chimed in Friday on a new victim of the austerity measures, cooperative organizations, which under the latest revision would see their taxes hiked.

Bertone said the "virtuous," good that co-ops do particularly in crisis times "merit treatment that is better than what has been given them" in the lastest austerity revision.

The ECB has been buying Italian bonds in the secondary market as an emergency measure to keep the country's borrowing costs from skyrocketing due to fears it may eventually default.

Greece, Ireland and Portugal have already needed to be rescued with loans from other eurozone countries, but Italy is regarded as too large for the eurozone's euro440 billion rescue fund to bail out.

Berlusconi announced the austerity measures on Aug. 5 and said the country would try to balance its budget by 2013, a step that cleared the way for the ECB to start the government bond purchases on Aug. 8.

The purchases have kept the crisis at bay for now. Buying bonds raises their prices and lowers their interest yields, which move in opposite directions.

Trichet said that Italy's growth record has been "disappointing."

"For this reason, I believe in particular that structural reforms are necessary to increase the growth potential of an economy held back by too many obstacles," he was quoted as saying by Il Sole.

Despite the concern, Germany said Friday it had "full confidence" that Italy would live up to its promises.

"One of the lessons from the last year and a half or two years of the financial crisis and the debt crisis is, I think, (the need for) reliability, that governments' announcements correspond to their actions," German Chancellor Angela Merkel's spokesman, Steffen Seibert, said in Berlin.

The German government, he said, "has taken note of recent days' news from Italy and has full confidence that the Italian government will take the measures in such a way that the volume of savings that was promised, and the corresponding budgetary effects that were promised, will be fulfilled."

Italy's debt burden of 120 percent of annual economic output is the second highest in the eurozone after Greece. It has carried heavy debts successfully for years because bond investors have always been willing to loan more money as bonds came due.

Bond markets began however to look more skeptically at Italy after the Greek, Irish and Portuguese bailouts and the government has had to pay more to borrow as a result. That threatens a vicious circle in which rising interest costs threaten to sink government finances and the country finds itself cut off from bond markets. In that case it either needs a bailout loan from another source or must default.

Italy's prospects of getting out of the crisis are complicated by weak prospects for economic growth.