Austerity-Plan Drama
Berlusconi Changes Tack on Cuts as He Seeks a Politically Palatable Solution. By STACY MEICHTRY And GIADA ZAMPANO
ROME—Italian Prime Minister Silvio Berlusconi's penchant for dramatic flourishes is out of sync with a slow-burning debt crisis that demands steady political leadership and a clear plan to tackle Italy's chronically low economic growth, some analysts and observers say.
In the space of two months, Mr. Berlusconi has unveiled a flurry of budget-tightening measures and countermeasures, sowing confusion among both supporters and critics.
Premier Silvio Berlusconi, in Rome in August, is grappling with cuts.
.On Wednesday, people with knowledge of the situation said Mr. Berlusconi's government was planning to scrap a multibillion-euro program to delay pension payments for scores of Italians, potentially marking the fourth and fastest change of course in the government's summer of austerity.
A spokesman for Mr. Berlusconi declined to comment on whether the government was dropping the pension change.
The changes risk exacerbating investor concerns that Mr. Berlusconi doesn't have the stomach to pass unpopular measures that would allow Rome to pay down the country's €1.9 trillion ($2.7 trillion) debt, equivalent to 120% of Italy's gross domestic product.
"There is a replay of measures that appear and disappear, batting their wings and then dying like butterflies that live a few hours, just long enough to enchant the children," said a front-page editorial in Wednesday's edition of Corriere della Sera, Italy's biggest daily.
Mr. Berlusconi's spokesman declined to comment on the prime minister's leadership.
The prime minister, who recently returned from a holiday on the island of Sardinia, is under intense pressure to offer a final package of austerity measures before mid-September, when Parliament is expected to vote on the matter. The European Central Bank, which began buying Italian bonds in August to help bring down the country's borrowing costs down from record highs, has called on Italy to pass growth-boosting measures to revive its stagnant economy, which is held down by high youth unemployment, heavy taxes and crushing red tape.
"The mood in Italy won't change until the government does more on the growth side," said Fabio Fois, an analyst with Barclays Capital. "This going back and forth on the austerity plan isn't helpful. Markets will stay nervous."
Olli Rehn, the European Union commissioner for monetary affairs, was "paying close attention" to Italy's shape-shifting austerity package, his spokesman Amadeu Altafaj said Wednesday.
In the meantime, other weakened European economies are forging ahead with austerity measures. Portugal's government on Wednesday announced a raft of new tax increases and spending cuts that aim to bring the country close to a balanced budget by 2015.
Mr. Berlusconi's supporters see the debt crisis as a defining moment in a 17-year political career that has thrived on drama. The billionaire media mogul has cultivated an image of the consummate crisis manager, ready to take bold action in the face of disasters. He has repeatedly sent the military to clean up the trash-strewn streets of Naples, which has struggled with a dysfunctional waste-management system, and he moved the 2009 Group of Eight summit from sun-splashed Maddalena Island to the earthquake-stricken town of L'Aquila in a bid to win sympathy—and reconstruction funds—from world leaders. He won pledges of aid during the summit.
But some analysts say Mr. Berlusconi appears loath to administer the kind of bitter economic medicine—such as making Italy's rigid labor market more flexible or enacting sweeping tax increases—that could alienate his political allies.
At the same time, the premier has maintained a combative stance toward left-leaning opposition parties and labor unions that wield the power to broker a political compromise.
CGIL, Italy's largest union, has called a general strike for Sept. 6 that has gained support from other union leaders as the austerity makeovers have piled up.
"Berlusconi's model of leadership doesn't work in this environment," said Fabio Sdogati, an economist with Milan's Polytechnic University.
In July, Mr. Berlusconi rushed the government's initial austerity package through Parliament. Those measures aimed to balance Italy's budget by 2014 and eschewed unpopular tax increases and pensions reforms. But the plan did little to impress investors, and Italy's borrowing costs spiraled to their highest levels since the introduction of the euro.
In mid-August, Mr. Berlusconi returned to the drawing board, devising a plan to balance the budget by 2013 by levying a 5% tax on Italians who earn more than €90,000 a year and a 10% tax on earnings above €150,000.
The premier defended the proposed tax as an essential step to reassure financial markets and the ECB about Italy's creditworthiness, pledging to impose the levy even though it made his heart "stream with blood."
By Monday, Mr. Berlusconi and his allies had dropped the tax proposal.
After a seven-hour conclave at his Milan villa, Mr. Berlusconi and his ministers said they had found a silver bullet: A plan to delay pension payments, by no longer allowing Italians to include their college years and military service in the 40 years of work needed to be eligible for retirement.
The plan was expected to save between €500 million and €1 billion a year, according to a government official, because military service was compulsory in Italy until 2005, and low university fees had kept enrollment high.
"I'm very, very satisfied, because the austerity plan has been improved," Mr. Berlusconi said. "I've always worked this August to make this plan fairer and more sustainable."
Less than 48 hours later, the pension plan was on life support as unions, opposition lawmakers and business leaders railed against the changes.
Mr. Berlusconi, meanwhile, appears to be running out of austerity options.
"The measure has blown up, but the need for pension reform remains," said Minister for Youth Giorgia Meloni, a member of Mr. Berlusconi's party.
Write to Stacy Meichtry at stacy.meichtry@wsj.com and Giada Zampano at giada.zampano@dowjones.com
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