Monti Renounces Prime Ministerial Salary As Recession Looms for Italy

Italy is expected to slip into recession in 2012, with a projected contraction of 0.5 percent in its gross domestic product. The outlook was announced by the country’s deputy economic minister, after Italy’s cabinet passed a deal intended to rescue the country from the brink of bankruptcy.

Italy is expected to slip into recession in 2012, with a projected contraction of 0.5 percent in its gross domestic product. The outlook was announced by the country’s deputy economic minister, after Italy’s cabinet passed a deal intended to rescue the country from the brink of bankruptcy.

The latest emergency budget, reported to be worth €24 billion ($32 billion), was aimed at restoring credibility to the eurozone’s largest debtor nation. According to media reports, the confidential cabinet meeting which took place on Sunday saw the technocratic leaders approve a harsh package of tax rises, pension reforms and spending cuts, with the Prime Minister Mario Monti determined to bring the deficit to zero by 2012.

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“This is a decree to save Italy Monti told reporters after the cabinet meeting. Italy will “put its deficit and debt under strong control,” he said.

Despite the advancements, the eurozone’s third largest economy may not be able to avoid a recession in the coming year. According to the Organisation for Economic Cooperation and Development, the Italian economy could contract 0.5 percent in 2012, after growing a sluggish 0.7 percent this year.

Italy faces “deteriorating confidence, weak export-market growth and difficult financial conditions,” the Paris-based OECD said. “Further measures will be required to keep the fiscal adjustment program on track.”

Former head of Italy’s largest retail bank Intesa Sanpaolo and current economic development minister Corrado Passera warned last week that Italy “definitely risks returning to recession through no fault of our own,” adding that the country is experiencing a “difficult” moment.

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Monti also warned that Italians had to make “sacrifices” and said he was renouncing his prime ministerial salary in a gesture of solidarity.

According to the AFP, Monti’s austerity package would increase taxes on housing and luxury and includes an option to raise value-added tax if necessary from 2012. Additionally, it includes a controversial pension reform that will increase the minimum pension age for women from 62 from 2012 to see both sexes retire at 66 by 2018, as well as increase the number of years men have to pay their taxes.

[quote]We’re faced with an alternative between the current situation, with the required sacrifices, or insolvent state, and a euro destroyed perhaps by Italy’s infamy, Monti said. [/quote]

Undoubtedly, trade unions and free-market economists have protested the package. In an opinion piece in the Italian daily, Corriere della Sera, Harvard professor Alberto Alesina and Bocconi University professor Francesco Giavazzi criticised Monti’s plan saying the government was less likely to plunge Italy into recession if it cut spending, yet the controversial budget appears “three-quarters of which is made up of higher taxes.”

Italy’s debt currently stands at 120% of its GDP and its long-term borrowing costs have spiked as high as 8.0 percent, as markets and investors remain unconvinced of Italy’s ability to finance its debt. 

Related Statistics: Italy’s total government gross debt (% of GDP)