UPDATE 3-Berlusconi defends austerity cuts, but strike looms

* Union leader says to propose general strike

* Berlusconi says sacrifices needed to save euro

* Cuts threaten further erosion of Berlusconi popularity

* IMF, rating agencies welcome austerity plan

(adds IMF comment, economy minister, details)

By Silvia Aloisi and Daniel Flynn

ROME, May 26 (BestGrowthStock) – Italy’s Silvio Berlusconi defended
his government’s 25 billion euro austerity package on Wednesday
saying sacrifices were needed to save the European currency, but
the country’s largest union announced plans to strike.

Prime Minister Berlusconi’s cabinet approved the package of
cuts with an emergency decree late on Tuesday, joining European
peers like Spain and Portugal in pushing through spending cuts
to stave off contagion from the Greek crisis.

Italy’s CGIL union, which groups more than 5 million
members, said the measures including a freeze on salaries for
state workers and steep cuts in funding of regional governments
would hit the poorest workers hardest and spare the rich.

“Public workers are prepared to make sacrifices but they do
not accept to be the only ones making sacrifices,” CGIL
Secretary General Guglielmo Epifani told a news conference,
announcing plans for a four-hour general strike next month.

Strikes are common in Italy, but a series of prolonged
labour protests would sharply increase pressure on Berlusconi,
who has shrugged off the crisis as a figment of the left’s
imagination.

Italy’s other major unions, CISL and UIL, were more
conciliatory about the plan but called for cuts to perks enjoyed
by politicians to save an “economy in war”.

Berlusconi, whose popularity has dipped over a corruption
scandal, defended the austerity measures at a press conference
on Wednesday after keeping an unusually low profile in recent
days, when he left the talking to his top aides.

“The sacrifices required are indispensable to save the
euro,” Berlusconi said, adding that Italy’s spending cuts were
less draconian than those approved by most of its EU partners.

“For years, Italy like many countries in Europe lived above
its means. We are all in the same boat.”

The euro zone’s third largest economy weathered the
financial crisis better than most of its peers, but its huge
debt mountain — around 118 percent of GDP — is on a par with
that of Greece.

The austerity package is designed to cut Italy’s budget
deficit, forecast at 5 percent of GDP this year, to 2.7 percent
in 2012.

But some commentators and unions fear that the spending cuts
will put the brakes on Italy’s already sluggish growth as the
economy slowly emerges from its worst post-war recession.

Italian media have reported Berlusconi is unhappy with the
package drawn up by Economy Minister Giulio Tremonti, fearing
the cuts are too severe and will further dent his approval
ratings. But Berlusconi denied the reports, and publicly thanked
Tremonti.

“There is no clash within the government,” he said.

ENCOURAGING, BUT ENOUGH?

Tremonti said the two-year package of cuts was worth 24.9
billion euros and included a 10 percent reduction in ministry
spending, the elimination of public agencies and a crackdown on
tax evasion and welfare fraud. Public sector wages will be
frozen for three years.

The plan drew strong praise from the International Monetary
Fund and other quarters, including European Economic and
Monetary Affairs Commissioner Olli Rehn, who called it “very
significant”. [ID:nWEN5187] [ID:nBRU010847]

Moody’s ratings agency said the package should reassure
markets about Italy’s commitment to cut its budget deficit S&P
said it should put public finances on a more sustainable footing
and preserve its current ratings. [ID:nMAT012343]

Fitch, meanwhile, said the measures were a significant step
toward the medium-term consolidation of government finances
needed to underpin Italy’s creditworthiness.

The yield spread on Italian 10-year bonds compared with the
German benchmark equivalent was broadly stable on Wednesday at
around 139 basis points after rises in recent days.

Economists said the plan was an encouraging first step but
probably not enough in the long run. [ID:nLDE64O2BZ]

“The main risk here is that growth might turn out lower than
the government has pencilled in, thus raising the need for a
further correction down the road,” said Davide Stroppa at
UniCredit.

With consumer morale at its lowest level in a year, the
chief of statistics agency Istat, Enrico Giovannini, warned the
cuts could undermine chances of a recovery in consumer spending.

To try to convince Italians that the sacrifices will be
spread evenly, the government has included pay cuts for
ministers, parliamentarians and senior state-sector managers.

The plan is also expected to press regional and local
governments to contribute some 13 billion euros of spending cuts
in 2011-2012, almost inevitably affecting schools and hospitals.
Busy arteries such as Rome’s ring road may become toll roads.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For a snap analysis on the plan click on [ID:nLDE64P055]

For a factbox on the measures click on [ID:nLDE64P0LY]

For newspaper editorial reaction click on [ID:nLDE64P0H5]

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Growth Stocks

(Writing by Silvia Aloisi and Deepa Babington, additional
reporting by Deepa Babington, Antonella Cinelli, Gavin Jones,
Valentina Za, Giselda Vagnoni, editing by Noah Barkin)

UPDATE 3-Berlusconi defends austerity cuts, but strike looms