Italy's senate has approved economic reforms demanded by the European Union, paving the way for Premier Silvio Berlusconi to resign as early as this weekend and a new government to be formed.
The senate voted by 156-12 today to pass the budget bill, which contained the reform measures. The lower Chamber of Deputies is expected to approve the legislation by Saturday.
Berlusconi has promised to resign as soon as parliament passes the reforms.
There are mounting indications that respected economist Mario Monti will be tapped to head a transitional government to push through even more difficult reforms to pull Italy back from a Greek-style economic crisis that would threaten the existence of the entire euro zone and cause a global recession.
The budget reform law involves nearly €60 billion euro in tax hikes and spending cuts. The main measure missing in the package is a promise to change labour laws to make it easier to fire people - a proposal that sparked trade union fury.
EU crisis fund chief urges Italy to act fast
The head of the euro zone crisis fund called on Italy to act swiftly to reassure markets about its financial and political stability, in an interview in several European newspapers today.
And he said that the fund was ready to help Italy immediately if it was asked. "Italy doesn't have much time to reassure the markets," said Klaus Regling, head of the European Financial Stability Facility, according to the Suddeutsche Zeitung newspaper.
"The country needs a functioning government as soon as possible," he stressed.
Regling said the fund was ready to step in to help Italy if necessary. "If a country comes and says it needs help straight away, then we are ready," he said.
Jitters pushed borrowing rates to alarming levels above 7% on Wednesday, but the yield on 10-year Italian bonds has fallen back since, standing at 6.48% this evening. Traders yesterday reported that the ECB had been buying Italian bonds.
US President Barack Obama, meanwhile, spoke to Italy's President Giorgio Napolitano yesterday and expressed confidence in his ability "to put an interim government in place in Italy that will implement an aggressive reform programme and restore market confidence," said White House spokesman Jay Carney.
EU economic affairs commissioner Olli Rehn warned that the debt crisis was dragging Europe towards a new recession in 2012 due to a "vicious circle" of government debt, vulnerable banks and collapsed spending.
And an EU forecast said growth across the euro zone in 2012 would collapse to 0.5% - a steep drop from its previous prediction of 1.8%.
Angela Merkel, the leader of economic powerhouse Germany, insisted Italy's political situation be "clarified as quickly as possible", echoing an earlier call from International Monetary Fund head Christine Lagarde.
The appointment of Monti, a former EU official who made his name in titanic competition tussles with US corporate giants like Microsoft is not a done deal after several leading members of Berlusconi's centre-right coalition insisted on early elections.
Here is a list of the principal reforms:
1. Sale of state assets - Italy will sell off state property, including ex-military installations and farmland in a bid to reduce debt of €1.9 trillion. Berlusconi has said the sale should raise €15 billion over three years. Investors can pay with Treasury bonds, helping to drive down the debt.
2. Liberalisation of professions - professions such as law and accountancy will be liberalised with the removal of minimum tariffs to boost competition on the labour market.
3. Liberalisation of public services - local authorities will have to make public services more competitive and scale back state involvement in energy, transport, water and garbage.
4. Pension reform - the retirement age will be increased from 65 to 67 by 2026 - although the measure in practice is only a reiteration of a reform already adopted which foresees an increase in the retirement age in line with life expectancy. But Berlusconi's Northern League coalition partner has refused to touch another system of calculating pensions which means workers can retire at any age once they have worked for 40 years.
5. Bureaucratic simplification - the aim is to reduce Italy's notorious red tape, in particular for businesses. A system "Zero bureaucratic zones" offering economic and legal assistance for businesses is to be set up around the country.
6. Incentives for hiring - there will be measures to encourage hiring and reduce youth and female unemployment in particular. There will also be measures to favour apprenticeships for the young, as well as part-time work and telecommuting.
7. Infrastructure - tax deductions will help revive the country's infrastructure, freeing up funding for new projects in a bid to boost growth.
Initial backing for Portugal's tough budget
Portuguese deputies have given preliminary approval to the government's 2012 austerity budget aimed at putting the country's finances in order despite widespread discontent at some of the measures.
Prime Minister Prime Minister Pedro Passos Coelho's centre-right government, elected in June, has a comfortable majority in parliament with 132 of the 230 seats.
The Socialists, who lost power in the polls, abstained in the vote while the extreme left, which counts 24 seats, voted against. The budget is scheduled for a final vote on November 30.
Portugal was bailed out in May to the tune of €78 billion by the EU and International Monetary Fund and the government has pledged to raise taxes and cut spending, an unpopular mix which has hit growth hard.
The 2012 budget, described by Passos Coelho earlier in the week as "very tough", will scrap annual bonus payments worth two months salary for civil servants and for pensioners with income above €1,000 a month.
The working day will be increased by 30 minutes in the private sector, while health and education spending will be slashed, topping off a series of measures already adopted in efforts to reduce the deficit.
Prime Minister Passos Coelho concedes that the measures are even tougher than those required under the EU-IMF bailout terms but says they are necessary to ensure its targets are met in the face of difficult economic conditions.
The government estimates that the budget will see the economy shrink 2.8% in 2012, while the EU expects a 3% downturn, the worst performance in the union.
EU, IMF and European Central Bank officials are currently in Lisbon to review progress under the bail-out deal and decide whether to clear the next €8 billion loan instalment.
