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European Central Bank Gives Italy Stiff Warning On Austerity Plan

Berlusconi

By FRANCES D'EMILIO   09/ 3/11 10:47 AM ET   AP

CERNOBBIO, Italy -- Italy's government, waffling for weeks on an emergency austerity plan, received a stern warning Saturday from the European central bank chief to promptly implement the deficit-fighting measures and to stay on target.

Premier Silvio Berlusconi is caught between trying to placate allies and satisfying both nervous markets and worried European Union officials.

Italy's Parliament is preparing to take up approval of the package of spending cuts and new taxes which Berlusconi promised will add up to a euro45.5 billion ($64.86 billion) austerity package. But every few days has seen some measures – including new levies on high-earners and reform of a generous pension system – dropped to appease coalition partners.

With Italy's uncertainty, European Central Bank President Jean-Claude Trichet urged Rome to keep to its word and push the package, announced in early August, toward completion.

"It is essential that the target which was announced to diminish the deficit will be fully confirmed and implemented," Trichet said at an annual economics forum at a Lake Como resort. "This is absolutely decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and its credit worthiness."

Italy got a boost last month by the ECB when Rome's borrowing costs dipped, thanks to the central bank's program of buying peripheral bonds. The intervention helped stem the widening debt costs.

The Italian foreign minister, Franco Frattini, told reporters as he arrived late Saturday at the forum that his government will insist that the ECB keep buying the bonds, the Italian agency LaPresse reported from Cernobbio.

The outgoing central banker deemed as "extremely important" all measures to improve the "flexibility" of Italy's economy. Both industrialists and union leaders have denounced the austerity plan as relying too much on slashed spending and new taxes and offering little to stimulate the country's practically flat growth or to encourage job creation.

But the ECB's own policies were being taken to task on the sidelines of the annual Ambrosetti forum.

"We need more stimulus, we need a weaker euro," which could spur exports, said New York University economist Nouriel Roubini. "You can't just talk about austerity." He urged the ECB to "at least send a signal there is going to be monetary easing" soon.

Asked by The Associated Press to respond to Roubini's criticism, Trichet, during a brief stroll of the posh lakeside Villa d'Este grounds at lunch time, declined to comment, saying he wouldn't talk about matters related to policy.

With Berlusconi widely considered to be distracted by a sex scandal linked to his self-acknowledged penchant for young, beautiful women, Roubini expressed concern that whatever the measures are, markets won't be reassured.

"Italy is always bickering," the economist, who has warned of a possible double-dip recession in some European countries, told reporters during a break in the closed-door forum sessions.

"Investors have lost credibility in this government," Roubini added, noting the repeated widening of the spread between Italy's bond interest rates and that of benchmark German rates.

The latest Berlusconi government proposal to achieve several billion euros in deficit reduction through a crackdown on widespread tax evasion could also rattle the markets since it's impossible to predict just how much revenue that strategy could achieve.

Earlier in the day, Italian President Giorgio Napolitano echoed Trichet's call to his country, saying the proposed measures must be quickly "translated into concrete terms" to achieve Berlusconi's goal of balancing the budget by 2013.

"In effect, we need now and in the near future from Italy clarity and certainty of intentions and of results," said Napolitano, who noted that an earlier austerity plan in July failed to placate nervous markets.

Napolitano urged Berlusconi's bickering government to be "coherent and courageous" in meeting the economic crisis. He recalled that Italy, suffering from lackluster productivity, already was lagging before the latest global economic crisis.

"There is no doubt that in general the political (arena) is struggling, in the face of the tensions of the crisis and the risks to which the eurozone is exposed, and that the internal political and social equilibrium of individual countries are being put to a tough test," Napolitano said in a video hookup from the presidential palace in Rome.

Austria's former chancellor, Wolfgang Schuessel, went further in characterizing the effects of the crisis on citizens.

"This loss of confidence and trust is much more damaging than any economic data," he said.

The three-day meeting of bankers, economists and politicians began on Friday and has been marked by generally gloomy assessments of global economic prospects.

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Filed by Maxwell Strachan  |