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Berlusconi defends austerity cuts, but strike looms

ROME (Reuters) - Italy’s Silvio Berlusconi defended his government’s 25 billion euro austerity package 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 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 labor 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 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.”

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.

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 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.

“The main risk here is that growth might turn out lower than the government has penciled 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.

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

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