MercoPress. South Atlantic News Agency

Italy joins the Euro-support club; announces budget cuts of 24 billion Euros

Prime Minister Silvio Berlusconi

Italy joined Tuesday the group of European countries that have decided to trim government spending in an effort to convince investors that Euro nations are capable of fiscal balance and defending the single currency.

Following a cabinet meeting Monday night Prime Minister Silvio Berlusconi’s government approved 24 billion Euros of budget cuts including a three-year wage freeze for civil servants and a crackdown on tax evasion.

“It’s absolutely necessary to do our part for Europe; to contribute to the financial stability of monetary union and to economic growth” said Italian President Giorgio Napolitano during a visit to Washington.

Italy follows Spain and Portugal’s lead in adopting additional budget cuts after European Union leaders this month set up a 750 billion Euro financial lifeline to back the region’s most-indebted nations. Fallout from Greece’s near default has led to a surge in borrowing costs in southern Europe and fueled investor concern about the survival of the Euro, which has fallen 14% this year.

The measures, worth 1.6% of Italy’s GDP aim to bring Italy’s deficit within the European Union limit of 3% of GDP in 2012 said Finance minister Giulio Tremonti.

Italy’s budget gap of 5.3% of GDP last year was less than half that of Greece, Ireland and Spain, which have the region’s three highest deficits. Italy also plans to reduce its shortfall to within the EU ceiling a year before Spain and Portugal, and two years before Greece. Italy has still been buffeted by the contagion because it has the region’s biggest debt at 115.8% of GDP and was up 10 percentage points last year.

The premium investors demand to buy Italy’s 10-year bond over German bunds, the European benchmark jumped 13 basis points to 138 basis points, almost twice the level at the start of this year. Spain’s spread against Germany reached 156.6 basis points, more than twice its average over the past year.

In the UK the new Conservative-Liberal Democrat government, which isn’t part of the Euro, pledged this week to cut spending by 8.6 billion Euros this year as it seeks to rein in a deficit of 11.1% of GDP.