Italy's Berlusconi cuts £40bn to head off Greek-style meltdown

Mail: 

Silvio Berlusconi yesterday said Italian hearts were ‘bleeding’ after announcing  savage spending cuts in an attempt to avoid a Greek-style meltdown.

As the Italian premier set out £40billion of public spending savings and job losses as part of a desperate bid to balance Italy’s budget by 2013, in Britain Chancellor George Osborne called for greater fiscal union among the eurozone countries to solve the ongoing crisis.

Mr Berlusconi said he had been forced to take an axe to Italy’s bloated public sector because the country’s debt burden was second only to that of Greece – accounting for an astonishing 120 per cent of the country’s gross domestic product.

The sense of crisis has mounted in recent weeks as Italian stocks and bonds were subject to a drastic sell-off. On Wednesday the Milan stock market suffered its sharpest one-day drop since the Lehman Brothers crisis in October 2008, with the main index falling 6.65 per cent.

The Italian Cabinet approved the £17.5billion of cuts for 2012 and £22billion for 2013 – on top of spending cuts announced last month – despite opposition from local government officials, who will bear the brunt of 50,000  job losses. The measures also included tax increases for those earning over £131,000.

Mr Berlusconi said: ‘Our hearts are bleeding. We’re facing one of the greatest challenges on the planet. The whole system of relationships between states is changing.’

His action followed requests for sharp austerity measures from the European Central Bank, which would be forced to bail out Italy if it defaulted on its debt.

Economists say the consequences of a default for the rest of Europe – including those outside the eurozone, such as the UK – would be calamitous. 

Calling for a tighter union between eurozone countries, Mr Osborne said: ‘I was against Britain joining the single currency. The remorseless logic of having a single currency is you end up having something akin to a single budget policy. You can’t have one without the other.

‘An unstable euro is very bad news for us. But we do have to allow greater fiscal union while protecting our own national interest.’

Mr Osborne, who told MPs last week it was ‘the most dangerous time for the global economy since 2008’, also said yesterday he had asked the Inland Revenue to check whether the controversial 50p top rate of tax could be justified in terms of the income it generates.

He is planning to cut 5p off the tax for high earners – but is struggling to persuade his Liberal Democrat partners in the Coalition that it can be justified at a time when most are having to tighten their belts.

Critics say the 50p rate is generating only marginal returns for the Exchequer because it encourages high earners to emigrate, take tax-avoidance measures or retire early.