* Italian Senate backs austerity package, lower house votes
* Papademos new Greek PM, Venizelos stays as finance
* Obama calls Merkel, Sarkozy and Italian president
* New Italian government may be in place before markets open
* EFSF head and ECB's Nowotny concerned about rescue fund
By Barry Moody and George Georgiopoulos
ROME/ATHENS, Nov 11 Italy's parliament
began rushing through austerity measures demanded by the
European Union to avert a euro zone meltdown, after U.S.
President Barack Obama ratcheted up pressure for more dramatic
action from the currency bloc.
Italy's Senate approved a new budget law, clearing the way
for approval of the package in the lower house on Saturday and
the formation of an emergency government to replace that of
Prime Minister Silvio Berlusconi.
In Athens, former European Central Bank policymaker Lucas
Papademos was sworn in as Greek prime minister after days of
political wrangling, tasked with meeting the terms of a bailout
plan to avert bankruptcy.
Obama spoke with German Chancellor Angela Merkel and French
President Nicolas Sarkozy late on Thursday and also called
Italian President Giorgio Napolitano.
A German government official said there had been an
"exchange of opinions" between Merkel and Obama, while Treasury
Secretary Timothy Geithner demanded fast action from Europe.
"The crisis in Europe remains the central challenge to
global growth. It is crucial that Europe move quickly to put in
place a strong plan to restore financial stability," Geithner
said in a statement following a meeting with finance ministers
from the Asia Pacific Economic Cooperation countries.
After months of dither and delay, Rome appears to have got
the message as bond markets pushed it to the brink of needing a
bailout that the euro zone cannot afford to give.
If the votes pass smoothly, Napolitano will accept
Berlusconi's resignation over the weekend and ask veteran former
European commissioner Mario Monti, a technocrat like Papademos,
to form a government.
Berlusconi has promised to resign after the financial
stability law is passed by both houses of parliament.
He had insisted on early elections but then softened his
stance. Markets were calmed by the prospect that there would be
an interim government, rather than a three-month vacuum before
elections are held.
"The most important element to overcome this crisis is a
very trusted and able new Italian government that can really
fulfil the structural changes that are needed," ECB policymaker
Ewald Nowotny told Reuters in Beijing.
The euro firmed but investors doubted whether it
would climb far, given that even a technocrat Italian government
might struggle to make progress on long-promised,
never-delivered fiscal reforms.
Italian 10-year borrowing costs fell sharply to 6.6 percent,
having hit an unsustainable 7.5 percent earlier in the week.
"We can have maybe two or three days of calm -- in inverted
commas -- but nothing has really changed underneath," one bond
Spain, the euro zone's fourth largest economy, which holds
elections in nine days' time, stopped growing in the third
quarter, raising doubts about its ability to meet deficit
With European leaders dithering over how to tackle the
deepening crisis, pressure has mounted on the European Central
Bank to act more forcefully by becoming a full lender of last
resort, as the Federal Reserve and Bank of England are.
"There is real turbulence in the markets, real question
marks over whether countries can deal with their debts and a big
question mark over the future of the euro zone," British Prime
Minister David Cameron said.
Three senior ECB policymakers on Thursday rebuffed
arm-twisting from investors and world leaders to intervene
massively on bond markets to shield Italy and Spain from
German Economy Minister Philipp Roesler said on Friday the
ECB did not have "unlimited firepower". He said if it opened its
floodgates fully, they could never be closed again.
Berlin strongly opposes the ECB taking on a broader
crisis-fighting role, arguing this would compromise the
independence of the bank.
The euro zone's plan for a more powerful rescue fund may
also be running into trouble.
Klaus Regling, the head of the 440 billion euro European
Financial Stability Facility, was reported by the Financial
Times as saying the recent market turmoil had made it more
difficult to scale it up to 1 trillion euros, as proposed by
euro zone leaders, who promise a definitive plan by December.
Luring bond investors by offering insurance on losses, the
centrepiece of a plan agreed in Brussels on Oct. 26, would now
probably use up more of the fund's resources, Regling said.
"The political turmoil that we saw in the last 10 days
probably reduces the potential for leverage. It was always
ambitious to have that number, but I'm not ruling it out," the
FT quoted him as saying.
Nowotny also expressed concern.
"It is very important that these plans -- actually these
decisions -- now really get operational, and I'm a bit concerned
that this takes a long time, perhaps too long," he said.
In Athens, Papademos, a former vice president of the ECB,
faces serious challenges at the helm of a new unity government
forged after a chaotic power struggle between Greece's two main
He has about 100 days to start fulfilling the terms of a 130
billion euro bailout plan to keep Greece solvent while placating
warring political factions.
Socialist party big-hitter Evangelos Venizelos will remain
finance minister in a new cabinet that includes many of the same
politicians who led the nation into crisis.
Automotive giant Daimler spoke out against
keeping Greece in the euro zone at all costs and said the euro
would survive even if it were forced out.
"I wouldn't consider one link splitting off from the rest as
a 'break-up' of the euro zone," Chief Executive Dieter Zetsche
told Reuters in an interview.