A couple of updates for Europe over the weekend. The Italian parliament ratified the first stages of a larger austerity plan to speed up budget cuts.
Italy’s cabinet has adopted sweeping austerity measures to cut the fiscal deficit by 45.5 billion euros ($64.8 billion) and balance the budget in 2013, a year ahead of its previous schedule.
The measures, which were passed by emergency decree on August 12, must now be approved by parliament within 60 days. They come less than a month after parliament approved a previous austerity package, aimed at eliminating the deficit in 2014.
Rome promised to re-write and frontload its plans in response to a letter from the European Central Bank, which agreed to buy Italian bonds to arrest a huge market sell-off in exchange for faster fiscal consolidation and economic reform.
Austerity measures will now total 20 billion euros in 2012 and 25.5 billion in 2013, Prime Minister Silvio Berlusconi said at a news conference after the cabinet meeting.
Economy Minister Giulio Tremonti said the budget deficit will fall to 1.4 percent of gross domestic product in 2012 from 3.8 percent this year, and be eliminated in 2013.
Here are some of the measures in the plan as outlined by Berlusconi, Tremonti and other government officials.
SPENDING CUTS
- Cuts to the budgets of central government ministries, worth a total of 6 billion euros in 2012 and 2.5 bln in 2013.
- Funding to town councils, regions and provinces reduced by 6 bln euros in 2012 and 3.5 bln euros in 2013.
- Largely unspecified changes to the pension system to save 1 billion euros in 2012. These include a ban on people being promoted just before retirement to increase their pension.
- A progressive increase in the retirement age of women in the private sector to 65 from 60 to begin in 2016, instead of 2020 as previously planned.
- The retirement funds of public sector employees will be withheld for two years if they leave their jobs before retirement age.
- Public sector workers will lose the cash equivalent of one month’s pay if the department they work in fails to meet savings targets.
- A reduction in the “cost of politics” resulting in a halving of elected officials and around 55,000 fewer positions in the apparatus of central and local government. However, Berlusconi did not give a timescale for these cuts
- All central and local government bodies with less than 70 employees will be abolished.
- Abolition of 34 of Italy’s 110 provincial governments and the merging of town councils with less than 1,000 inhabitants. However, this measure will be “for the future,” Berlusconi said, and not become effective during the government’s current term of office.
HIGHER REVENUES
- A “solidarity tax” on high earners, to be levied for three years, as an additional 5 percent on income above 90,000 euros per year and 10 percent on income above 150,000 euros.
- Increase in taxation of income from financial investments to 20 percent from 12.5 percent, excluding income from government bonds. However, if government bonds are not held until maturity, the interest income on them will also be taxed at 20 percent.
- Additions to a so-called “Robin Hood” tax on energy companies. The decree increases an existing 6.5 percent supplementary tax paid by energy companies by 4 percentage points, bringing the total to 10.5 percent. It also broadens the base by reducing the cutoff level from companies with annual revenues of 25 million euros to include those with revenues of 10 million euros or more. Tremonti said that if this measure raises the hoped-for revenue of 2 billion euros in 2012, then cuts to central government ministries and local authorities next year could be reduced to 5 billion euros instead of 6 billion.
- To curb tax evasion, receipt of any payment in cash worth more than 2,500 euros must be communicated immediately to the tax authorities. There will also be tougher penalties, such as suspension from professional bodies, for failure to issue receipts and invoices.
- All non-religious public holidays, such as the June 2 anniversary of the founding of the Republic and the April 25 World War Two Liberation Day will be celebrated on a Sunday in a bid to increase the number of working days in a year.
REFORMS
- A liberalization of national labor contracts giving greater scope to strike accords at the company or local level.
Yes I know it all sounds very Greek, probably because it wasn’t too long ago that they announced something similar as its economy “surprised” on the downside. We all know how that is working out for them but that hasn’t stopped others maintaining the delusion that austerity is the answer to Europe’s woes.
The Troika is praising Portugal for implementing the usual IMF recipe of changes, but as usual the country is struggling to meet “targets” while it receives yet another loan.
Portugal still faces some tough challenges but is on track to meet this year’s budget deficit goal despite a shortfall in performance so far, officials from the European Union and IMF said on Friday.
The officials, who carried out the first review of Portugal’s economy under a 78-billion-euro international bailout, said that they would recommend the disbursement of the second tranche of the rescue funds.
“There is no doubt that while we are off to a strong start the most difficult challenges are still ahead,” said Poul Thomsen, the IMF mission chief to Portugal.
He warned that if there was any serious weakening of the economic environment in core European states there would be a “significant negative impact.”
Portugal’s economy is expected to contract by 2.2 percent this year and only return to growth in 2013 as the government enacts tough spending cuts and across-the-board tax hikes.
Europe’s debt crisis has turned on Spain and Italy in recent weeks, heightening risks for the euro zone. But the officials said it was premature to talk about fresh rescue funds for Portugal, like Greece is set to receive.
“I am confident that Portugal will return to the market at the end of the program, so it’s too soon now to talk about new money,” Thomsen said. Portugal is to return to the primary bond market in the second half of 2013 under the terms of the deal.
Portuguese 10-year bond yields were unchanged after the announcement at around 11.7 percent. But the PSI20 stock index in Lisbon was about 2 percent higher, also benefiting from overall firmer European markets.
Finance Minister Vitor Gaspar earlier on Friday said the government would bring forward hikes in value-added tax on gas and electricity to this year from 2012. The government already announced last month a one-off tax on year-end bonuses which will generate a total of 1.25 billion euros.
The government said earlier in the summer that there had been a shortfall in this year’s budget inherited from the previous administration. Gaspar put the slippage at 1.1 percent of gross domestic product.
“Despite the positive evaluation by the mission, the budget shortfall in the first half and the tough international situation shows that Portugal confronts an immense challenge,” said Gaspar.
The government is still expected to announce additional spending cuts in September.
They always do, but that will only lead to missing some additional targets somewhere down the road. We are now seeing GDP contraction across Europe as austerity, or the fear of it, starts to take its toll on consumers and intra-European trade.
France’s economic growth fell to zero in the second quarter, dashing expectations of a modest expansion, as consumers sharply cut spending.
The data complicate the French government’s plans to reduce its budget deficit at a time when financial markets are questioning France’s prized triple-A credit rating.
Gross domestic product in the euro zone’s second-largest economy was flat in the second quarter after growing at a nearly 4% annualized rate in the first quarter, according to figures from national statistics agency Insee. The data fueled concerns that France, a key player in supporting euro countries in bailout programs, might struggle to meet its deficit targets.
Consumer spending, the traditional driver of the domestic economy, held up during the recession in 2009, but fell at an annualized rate of nearly 3% in the second quarter.
Earlier this year, spending was fueled by deliveries of new cars snapped up by households under a government-sponsored scrapping scheme. The cutoff for those incentives was the end of 2010.
Exports also stopped growing in the second quarter after a strong increase in the first, although weaker imports minimized the impact.
Everyone is aiming to cut, but the only thing falling is employment. The Troika’s plan is now about to kick off for Italy and I expect the outcome to be exactly the same, “surprisingly” large rises in unemployment while the government struggles to get to a budget surplus by inflicting ever greater spending cuts on itself and taxes on the populace.
At least this time someone is actually realising this all doesn’t make too much sense.
Italy’s problem is not a high budget deficit but chronically weak growth, and forcing it to frontload austerity measures just as its economy is moving into yet another downturn may prove dangerously counter productive.
After a massive sell-off of Italy’s government bonds threatened to make the euro zone debt crisis totally unmanageable, the European Central Bank agreed on Sunday to buy Italian bonds on the market, but only on stringent conditions.
The ECB, supported by the French and German governments, demanded Italy bring forward plans to balance its budget by one year to 2013 and urgently adopt reforms to liberalize its hidebound economy and boost growth.
Backed into a corner, Prime Minister Silvio Berlusconi accepted.
The second goal is vital and long overdue, but the first seems like a panic response to the recent market turmoil — which has also swept up Italy’s banks — and could undermine the prospects for recovery and even for public finances in the medium term.
To respond to the ECB’s prescription Economy Minister Giulio Tremonti must now frontload 20 billion euros of deficit cuts which could tip an already weakening economy into recession.
Early indications of measures considered, such as a wealth tax, cuts in welfare benefits and slashing tax breaks for firms and families will do nothing to help stagnant domestic demand.
“This latest fiscal tightening will definitely hit the economy, private consumption is going to be significantly weaker,” said Barclays Capital analyst Fabio Fois.
He said in response to the latest news that he was in the process of cutting his growth forecasts for Italy, which stood at an anemic 1.0 percent in 2011 and 1.1 percent in 2012.
Berlusconi promised on Wednesday an emergency decree to approve austerity measures but faced union opposition over concern that the cuts would hit ordinary Italians.
A failed debt-cutting drive, if it also derails the structural reforms the economy desperately needs, could be the worst outcome of all.
It isn’t just the worst outcome it is the most likely, Greece is proof of that. And the parallels go further, with Italy’s trade unions threatening a general strike:
The leader of Italy’s largest union is threatening a general strike against an austerity package that Premier Silvio Berlusconi’s government hastily pushed through to balance the budget by 2013 and avoid financial collapse.
The threat came amid mounting criticism Sunday of the euro45.5 billion ($64.8 billion) package passed Friday in response to demands by the European Central Bank.
Critics say the package — a mix of spending cuts, job cuts and tax increases, including a “solidarity tax” for high-earners — will strangle Italy’s stagnant economy, which is now expected to grow by only about 1 percent this year.
Other critics, including nine members of Berlusconi’s own coalition, say it unfairly targets the middle class and fails to tackle Italy’s massive tax evasion problem.
The political economy process associated with European austerity remarkably clear: cut public spending > reduce private activity > raise unemployment > increase civil unrest > lower government revenue > increase government borrowing. Why can’t they see it?