Italy Plans Cuts As Europe Gets A Credit Warning

Standard and Poor's on Monday warned eurozone countries that it may downgrade their credit ratings if they don't get their fiscal houses in order. Debt-ridden Italy is too big to fail, and too big to be bailed out by its EU partners. Its technocrat-in-chief Mario Monti hopes a new package of austerity measures will rein in debt and reassure the bond markets.

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Just in case Europeans did not realize the seriousness of their debt crisis, Standard & Poor's has added a push. The credit rating agency is warning the countries that use the euro to fix their finances or facing possible credit downgrade. Even nations like Germany and France, which have AAA ratings right now, the best possible rating, would be affected. S&P is the same agency that downgraded the United States, the world's largest economy, over the summer.

So were going to talk about this more with NPR's Sylvia Poggioli. She's following the story from Rome.

Hi, Sylvia.

SYLVIA POGGIOLI BYLINE: Hi, Steve.

INSKEEP: Even though we've been through this once before in the United States, people are asking what does it mean that S&P would make this warning?

BYLINE: Well, it means the ratings agency believes the eurozone crisis is deteriorating. It blames the European political elite for what it calls the deepening political, financial and economic problems in the eurozone. It cites, among other things, continuing disagreements among European policymakers on how to tackle the immediate crisis.

It's the first time Germany's top rating has been threatened, and it comes after several warnings that the economies of the entire eurozone - including Germany's - could slip into recession. In fact, with consumption shrinking due to austerity measures in the peripheral economies, export economies such as Germany's are also suffering.

INSKEEP: You mentioned austerity measures. Governments are finally beginning to get their hands around larger and larger pieces of this problem. Why would S&P issue the warning now?

SYLVIA POGGIOLI, BYLINE: Well, it piles on the pressure to hurry up. At the EU Summit at the end of this week, French President Nicolas Sarkozy and German Chancellor Angela Merkel will present a plan to rewrite European Union treaties to enforce greater fiscal discipline and give oversight authority over national budgets to the European Union Commission. It's an ambitious plan, but it's likely to encounter serious opposition from EU members outside the eurozone, in particular Great Britain and Poland, who fear they'll be left on the sidelines.

And, you know, moreover, even if it's accepted, the plan would still require ratification of the national parliaments, and that's a long process. So the so-called Merkozy Plan does not deal with the immediate eurozone crisis, and the sense of urgency is even greater now after the Standard & Poor credit watch warning.

INSKEEP: Although you do understand now why France and Germany would step in so dramatically, because this seems to underline the way that France and Germany, even though their finances are said to be in better shape - in much better shape in Germany's case - they're tied into this crisis.

POGGIOLI: Absolutely. And, of course, everybody's now looking to Italy, where yesterday the new prime minister laid out his plan to tackle the country's debt. He called it the Save Italy Plan, but he said it could also be called the Save Europe Plan, because as Italy goes, so goes the euro. This is Europe's third-largest economy, and it's simply too big to bail out.

During the Cabinet press conference on Sunday, Labor Minister Elsa Fornero actually broke into tears as she outlined pension system reforms and hikes in the retirement age. Other measures include the reintroduction of a realistic property tax, a new levy on luxury items, new sales taxes and a crackdown on Italy's rampant tax evasion. Markets welcome the measures, and international reaction was also very positive.

INSKEEP: But how are people on the streets responding?

POGGIOLI: Not half as positively as the rest of the world. Italy is a country with a very high rate of home ownership, so the property tax is going to really hurt a lot of people. Angry comments posted on newspaper websites focus on what people see as an unfair burden on the middle class, and just like in Greece a few months ago, there are a lot of protests that church-owned property is exempt from the new tax. Labor unions reacted swiftly. The announced strikes for next Monday to protest the measures that they say are too tough on pensions and salaried workers.

INSKEEP: I have to ask one more thing, Sylvia Poggioli. Governments are in the midst of all these austerity measures. Of course, they have to do them, but at the same time, austerity measures have a way of dragging down the economy. Is there some concern among economists that as they cut budgets in an effort to reduce budget deficits, they will also in the end hurt economies, reduce revenues and maybe increase their deficits even more along the way?

POGGIOLI: Well that's exactly also the point that the new Prime Minister Monti himself, an economist and a technocrat has raised several times. He said we cannot only impose austerity measures. We have to stimulate growth. So far in this package, something like one-third of the measures are supposedly aimed at stimulating growth, but some of the business lobby organizations say it's too high on taxes, not enough stimulus. We'll have to see how it works out here.

INSKEEP: NPR's Sylvia Poggioli is in Rome. Sylvia, thanks very much.

POGGIOLI: Thank you, Steve.

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