Italian Economy Minister Giulio Tremonti promised reforms to boost growth and public finances on Thursday, acknowledging publicly that the government was responding to demands for action from the European Central Bank.
Tremonti offered few details but his comments to a parliamentary committee underlined the remarkable extent to which Italian policy was being dictated by European partners in exchange for help in halting last week's dramatic market slide.
“If I can be a bit specific on the recommendations that come from outside, these regard both the growth side as well as the public budget side,” he said.
The ECB began buying Italian government bonds this week to stem market panic which threatened to engulf the euro zone's third largest economy, but it only stepped in after securing reform commitments from Rome.
Italy has been at the centre of a sharp escalation of the euro zone debt crisis in the past month, slipping close to a Greek-style emergency that would overwhelm existing bailout mechanisms as markets questioned both its huge debt burden and its stagnant economy.
Tremonti told lawmakers the government was ready to comply with ECB requests for steps to liberalise the economy but was still working out detailed plans to meet its demand for balancing the budget by 2013.
“We have to pass a very strong fiscal adjustment package for this year and 2012 and for the following year, 2013,” he said. “The detailed numbers are currently being worked out.
“The political choice on how to re-focus efforts on 2012 and 2013 is a choice we still have to make,” he said, adding that plans, likely to focus on pensions and tax as well as labour and market reforms would be presented at the next cabinet meeting.
After a hectic day in which Prime Minister Silvio Berlusconi met Bank of Italy Governor Mario Draghi and President Giorgio Napolitano, government sources said cabinet may meet as soon as Friday to adopt a decree, despite the lack of firm plans so far.
A source close to Napolitano said he wants quick approval of emergency austerity measures and he is talking to the opposition to see if it will also back them.
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The government will have to find around 20 billion euros ($28.5 billion)in savings and revenue to reach its 2013 balanced budget target, which was brought forward from an original target date of 2014.
Tremonti confirmed that ECB President Jean-Claude Trichet had written to the government laying out reform demands and said the ECB, France and Germany had “suggested and appreciated” the goal of bringing forward budget plans.
But he rejected opposition and union demands that the letter be made public, saying that would be up to the ECB.
He said ECB demands included full liberalisation of local public services and the professions, more flexible employment contracts, easier hiring and firing rules to free up the rigid labour market and cuts to public sector pay.
Additional measures included increasing the retirement age for women employees in the private sector and a change in rules on when workers can retire based on their pension contributions.
Tremonti said the proposals on hiring and firing and cuts to public sector pay were not in the government's plans, but he added that there was a need for action on freeing up the economy as well as cutting the cost of government.
He rejected the idea of a wealth tax on private assets but said the government was open to suggestions on taxing financial income, including a possible increase from the current rate of 12.5 percent to 20 percent, excluding government bonds.
What will finally end up in the government's decree is unclear and even Umberto Bossi, the fiery head of Berlusconi's main coalition partner, the Northern League, described the government approach as “woolly”.
That comment, and a threat by four members of the ruling PDL party to vote against the measures underlined the divisions which have plagued Berlusconi's fractious centre-right government for months.
Bossi also laid into the ECB, accusing the Frankfurt-based central bank of acting for political motives, with the connivance of Berlusconi's political opponents.
“I fear the letter was written in Rome,” he told reporters. “I fear there is an attempt to bring down the government.”
Bossi seemed to be referring to Bank of Italy Governor Mario Draghi, who will succeed ECB President Jean-Claude Trichet this year and who has previously widely been seen as the potential head of a temporary technocrat government.
“Draghi, instead of being in Europe, is always in Rome,” he said.
The Northern League — whose voter base is in the small business sector and middle and working classes of the prosperous north of Italy — has also joined the CGIL, Italy's biggest union federation in opposing cuts to pensions.
