Italy has been spared the worst of the market volatility since Greece's debt crisis exploded, thanks mainly to the cautious fiscal policy of Economy Minister Giulio Tremonti,meaning it is now under less pressure to adopt draconian cuts.
Italy shunned large-scale stimulus during the recession of 2008 and 2009 and its deficit, at a projected 5 percent of GDP in 2010, rose far less than in Greece, Spain, Portugal, Ireland or Britain, which are all in or close to double digits.

ROME, May 21 (Reuters) - Italy will present measures next week to cut its budget deficit by some 13 billion euros in 2011,the first phase of a two-year plan to bring the gap back below the EU's 3 percent of gross domestic product threshold in 2012.Following are some measures likely to feature in the package, which sources say may be approved by the cabinet on Tuesday, with approximate estimates of the savings possible,according to Treasury sources and government officials.

 * Freeze on public sector hiring and pay rises, pay cuts for highly paid civil servants and politicians:  5-6 bln euros
 * Block on retirement for a few months for those approaching retirement age:  2-4 bln
 * Reduced funding to municipal governments: 1-2 bln
 * Cuts in government purchases of goods, services: 1-2 bln
 * Crackdown on tax evasion, false benefit claims, illegal building work: 1 bln
 * Reduction in fiscal incentives for companies: 0.5 bln  WHEN WILL THE MEASURES TAKE EFFECT?The above measures will take effect in 2011.However one Treasury source said the government may bring some of them forward to 2010 in order to reassure financial markets and help re-finance military missions abroad and cash-strapped public road-builder ANAS.  HOW URGENT IS DEFICIT REDUCTION FOR ITALY?Italy has been spared the worst of the market volatility since Greece's debt crisis exploded, thanks mainly to the cautious fiscal policy of Economy Minister Giulio Tremonti,meaning it is now under less pressure to adopt draconian cuts.Italy shunned large-scale stimulus during the recession of 2008 and 2009 and its deficit, at a projected 5 percent of GDP in 2010, rose far less than in Greece, Spain, Portugal, Ireland or Britain, which are all in or close to double digits.However Italy remains vulnerable due to its massive public debt of around 118 percent of GDP. Markets and ratings agencies want evidence that recent rises in the debt can be reversed through structural deficit cuts and pro-growth policies.  HOW WILL THE DEFICIT CUTS BE RECEIVED? ARE THEY SURE TO BE APPROVED BY PARLIAMENT?Prime Minister Silvio Berlusconi has an ample parliamentary majority, meaning that in theory there should be little threat of the package not being approved.However, unions will be angered if the freezes on public sector pay hikes and hiring are confirmed. Berlusconi has a bad track record for facing down public protest and his popularity has been dropping for months due to coalition bickering and scandals over his private life and corruption in his government.There is a risk that discontent over the cuts could increase government instability, raise the chance of early elections or even lead Berlusconi to row back on some of the measures.  AND THE MARKETS?Analysts say the savings laid out so far look broadly credible but are also concerned that some measures are temporary rather than structural, such as the block on retirement and public sector hiring freezes.They would prefer to see legislation for a permanent increase in the retirement age, which currently averages at 61.This is also urged by the Bank of Italy and employers' lobby Confindustria but has been ruled out by government officials.As such, the package is unlikely to produce any market backlash but is also unlikely to safeguard Italy in future if market volatility increases or the government's survival looks at risk. (Additional reporting by Giuseppe Fonte, Paolo Biondi,Francesca Piscioneri; editing by Patrick Graham) 

http://www.reuters.com/article/idUSLDE64K0SF20100521
 

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