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Italy to face international pressure if crisis drags on

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(Globalpost/GlobalPost)

By Alessandra Galloni and Giselda Vagnoni

ROME (Reuters) - Italy could face pressure from international partners if the current political crisis persists and reverberates through the euro zone, Labour Minister Enrico Giovannini said on Sunday.

Speaking a day after Silvio Berlusconi pulled his ministers out of the cabinet, Giovannini said the move -- which pulls the rug from under Prime Minister Enrico Letta's government and lurches the country into another political crisis -- is likely to cause some instability on financial markets on Monday.

The volatility need not last if there is a quick resolution to the crisis, Giovannini told Reuters in an interview.

He said there was no prospect of Italy following Greece or Portugal and being placed under special oversight by the European Commission, International Monetary Fund and European Central Bank "troika".

But he said Italy, which has only recently regained its footing with financial markets and its European Union partners, was walking a fine line on the international stage.

"If instability were to persist and affect the euro zone, then international authorities could put much stronger pressure on national authorities," said Giovannini.

"That's why this crisis is the last thing we needed."

Berlusconi asked for and obtained the resignation of five ministers of his center-right party on Saturday, plunging the government into crisis only five months after it came to power.

Letta and President Giorgio Napolitano, are expected to seek a new parliamentary majority to back a cabinet and avoid elections.

Though Berlusconi says he wants to go to a vote, much of the political establishment - and in particular, Napolitano - want to avoid elections, just seven months after the last ones, which produced deadlock.

Saturday's resignations followed a meeting when the cabinet, failed to approve some 3 billion euros of tax hikes and spending cuts aimed mainly at keeping Italy's budget deficit under 3 percent of national output this year.

According to the latest government figures, Italy is expected to marginally overstep the European Union's 3 percent deficit ceiling this year.

SAFE GROUND

Giovannini said whatever cabinet might emerge from the crisis would to bring the deficit back in line.

"There is no risk the 3 percent will be violated in the next few years. We are absolutely on safe ground," he said.

Because the Friday decree was not approved, however, Italy's sales tax will now rise to 22 percent from 21 percent -- in accordance with a previous law passed by the previous technocrat government of Mario Monti.

That could be an extra burden on Italians, who are only just emerging from a crippling recession. Though there are signs that business and consumer confidence is improving, unemployment among young people excluding students is close to 40 percent and the number of people in absolute poverty has risen to 5 million.

Giovannini said that the upcoming sales tax increase would not necessarily lead to a hike in prices. However, he said that if companies do not pass the tax increase onto consumers, the impact to their bottom line was likely to translate into fewer investments in the next few months.

"This could mean that the growth rate might be lower than the 1 percent estimated (by the government) for 2014," said the minister, who was brought in by Letta from his previous post at the helm of Italy's statistics agency.

Renewed political crisis means Italy will again postpone crucial structural reforms aimed at reducing its 2 trillion-euro-debt and laying the foundations for a healthier economy.

Friday's thwarted decree also now puts at risk shorter-term measures, including some 330 million euros in extra funds for Italy's job support scheme, 35 million euros to extend a food stamp program until the end of the year.

"The end of recession was supposed to give people a new outlook. Political instability could threaten not so much the economic recovery we expect before year-end, rather a pick-up in growth in 2014," the minister said. "And this could dampen people's hope in the future."

(Editing by Anna Willard)

http://www.globalpost.com/dispatch/news/thomson-reuters/130929/italy-face-international-pressure-if-crisis-drags