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New PM vows to save Italy from austerity

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(Globalpost/GlobalPost)

Italy's new Prime Minister Enrico Letta said Monday his coalition government would act fast to reverse an austerity policy he argued was killing Italy and called on Europe to become a motor for growth.

"Italy is dying from austerity alone. Growth policies cannot wait," Letta said during his inaugural speech to parliament, under the watchful gaze of European partners.

The recession-hit country, effectively rudderless since an inconclusive election in February, is under pressure to act fast to tackle social, economic and institutional ills.

The leftist moderate, who was sworn in with his cabinet on Sunday, promised to have results in 18 months or "take the consequences."

He said the economic situation in Italy -- one of the first countries to fall prey to the eurozone debt crisis -- "is still serious" and its two-trillion-euro ($2.6 trillion) debt "weighs heavily" on ordinary Italians.

But he also looked to Europe, saying it was suffering from "a crisis of legitimacy and ... must become once more a motor of sustainable growth" -- a reference to his aim to persuade Europe to reverse its disputed austerity policy.

The 46-year-old moderate from the centre-left Democratic Party said he wants to deal quickly with the social fallout of the longest economic slump in 20 years by tackling a jobless rate of 11.6 percent and regulating temporary job contracts.

He also said a controversial housing tax imposed by Monti would be suspended from June -- though he did not mention the refund former premier Silvio Berlusconi had been pushing hard for.

Letta, a Catholic, promised to renew confidence in the country's scandal-hit political class and clean up a society dogged by corruption, saying he was "aiming big, just as Pope Francis has told us to do."

Investors appeared buoyed by the new leadership, with Italy performing well at its first market test, paying significantly lower rates to raise 6.0 billion euros ($4.58 billion) at a five and ten-year bond auction

"The contrast between the shock and uncertainty stemming from February's inconclusive election and the extremely favourable sentiment towards Italian paper right now is striking," said Nicholas Spiro from Spiro Strategy, a sovereign credit risk consultancy.

However, official figures on Monday showed that business confidence dropped sharply this month and the shooting of two policemen by an unemployed man outside government headquarters on Sunday showed that social desperation was not far from the surface.

Letta said the political class had to react to the growing anti-establishment voice in Italy, which was driven by anger over politicians' perks at a time of widespread financial difficulties.

The government's first act would be to cut the salaries of ministers who are also members of parliament, and are therefore currently eligible for two salaries, he said.

The markets reacted favourably to Letta's speech, with Milan stocks up around two percent afterwards.

Letta "symbolises a new generation in Italian politics and a less partisan approach," Unicredit chief economist Erik Nielsen said.

Ratings agency Moody's had warned Friday of an "elevated risk" that a continued political stalemate would harm investor confidence.

Economy Minister Fabrizio Saccomanni, formerly director general of the Bank of Italy, said Sunday he would launch a pact with banks, businesses and consumers to boost growth.

Italy's debt will rise to 130.4 percent of gross domestic product this year, while the economy will shrink 1.3 percent, according to official forecasts.

Letta's success will also rely on ensuring the continued support of the political parties and he will have to work to keep his own party from imploding after a deeply damaging rebellion last week.

The government will go to a confidence vote in the lower house of parliament later Monday with a vote in the upper house Tuesday.

Analysts say the coalition is likely to last long enough to push through key reforms -- including a revision of the complex electoral law which created the deadlock -- but may be brought down by sparring parties within a year or two.

Some fear a resurgent Berlusconi -- who installed his protege Angelino Alfano as the government's number two -- may withdraw his support once he believes he could win a fresh poll.

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http://www.globalpost.com/dispatch/news/afp/130429/new-pm-vows-save-italy-austerity