MICHELE NORRIS, Host:
And this week, Italy became the front line in the battle to save the euro. Italy is the eurozone's third largest economy, and it's facing its own debt crisis. Recently, the European Central Bank made the unprecedented decision to dictate budget-cutting policy to Italy. As NPR's Sylvia Poggioli reports, the prime minister now has to accelerate tough austerity measures.
SYLVIA POGGIOLI: A week ago, Silvio Berlusconi was telling parliament that the Italian economy is solid. And he expressed confidence that Italy can deal with its huge debt - 120 percent of GDP, the second largest in the eurozone.
At the same time, in Frankfurt, the president of the European Central Bank, Jean-Claude Trichet, and the man who will soon succeed him, the Italian Mario Draghi, were drafting a letter to Berlusconi. It reportedly listed in meticulous detail what Italy must do to reduce its debt mountain - with what kind of legislation, and even the precise timetable. In exchange, the ECB would help by buying Italian treasury bonds whose yields have hit record and unsustainable levels.
As soon as he got his new marching orders, Berlusconi promised to deliver. Financial analyst Danilo Caselli says with that letter, the government's decision-making powers were sharply cut back.
DANILO CASELLI: (Through translator) It's clear that our government has been put into receivership by the European Central Bank. Our course has been charted. All Italians will have to undergo very painful austerity measures for the next three years. The question now is to see exactly what they will be.
POGGIOLI: According to Italian media, the list of measures - many of which are to be imposed by decree - include privatization of state-owned companies, much more flexible labor market rules, and sharp cuts in government spending.
Berlusconi faces daunting opposition. Labor leaders are on the warpath against possible pension and health-care cutbacks. They're demanding much tougher action against tax evasion, which has reached a record of nearly 40 percent of working Italians. Unions also want to see drastic cuts in the massive amounts earmarked for salaries and perks of some 150,000 politicians.
Business leaders are also worried that more austerity measures will further curb economic growth, which has been stagnant for a decade. Massimo Muchetti is an editorialist for the authoritative daily Corriere della Sera.
MASSIMO MUCHETTI: (Through translator) What is really needed is a hefty tax on wealth, which will substantially help balance the budget. But you need credibility to impose that, and this government does not have a sufficient stock to ask for help from its citizens.
Berlusconi has been uncharacteristically silent for the last several days. He has come under sharp criticism for ceding crucial policy-making to the ECB. Opposition leader Antonio Di Pietro says Berlusconi's time is up.
ANTONIO DI PIETRO: (Through translator) A country that is under surveillance is not free, not democratic, is incapable of instilling respect in its institutions. The only solution is for Berlusconi to step down.
POGGIOLI: There is also much malaise within Berlusconi's own party at the sudden turn of events. Guido Crosetto is undersecretary of defense.
GUIDO CROSETTO: (Through translator) It is worrisome to think that the European Central Bank can put a country into receivership - be it Italy, Greece or whatever. And in the coming months, we have to ask ourselves whether national sovereignty still has any meaning.
POGGIOLI: The ECB's expansion of its operations surprised some of Italy's European partners. Several German analysts said that by buying up troubled bonds, the ECB is giving up its main role, fighting inflation. And some Europeans may fear that an increasingly bold European Central Bank could threaten the tightly guarded national sovereignty of all E.U. member states.
Sylvia Poggioli, NPR News, Rome.
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