The Sterling Crisis: Rome's painful path to recovery: Italian reforms

ITALY'S GOVERNMENT yesterday said it would raise the retirement age to 65, freeze civil servants' salaries, strip the better-off of some health services and pursue tax-dodgers, in a package of Draconian measures to cut the country's huge state deficit.

The measures, the most painful that Italians have had to face, are designed to reduce the deficit by 93 trillion lire ( pounds 42bn) - 43 trillion in savings, 42 trillion in increased revenues and about seven trillion from the privatisation of two state companies. The deficit is expected to reach 160 trillion this year.

The Prime Minister, Giuliano Amato, presenting the measures at a press conference, said 'that on them, depends the credibility of our currency . . . We must regain confidence in ourselves so that confidence in our country can be restored abroad.' On them also depended the life of the government, he said, indicating that it would resign if they were rejected in parliament.

Shortly after the announcement the lira, which had followed the pound out the European Monetary System (EMS) on Wednesday night after its 7 per cent devaluation on Sunday, showed a marked recovery, from 850 lire to the German mark two hours earlier, to 834 lire.

'For the first time in this country tough, credible measures have been adopted,' said the Budget Minister, Franco Reviglio. He predicted meanwhile that the devaluation would add half a percentage point to the 3.5 per cent inflation expected for 1993.

The retirement age, at present 55 for women and 60 for men, will rise to 65 for both progressively, which means that people will have to pay pension contributions longer before they can retire. For the next 15 months the right to early retirement will be abolished and increases in pensions will be linked only to increases in the cost of living and not to the average rise in salaries.

People with incomes - whether declared or merely estimated to be such by the tax authorities - of more than 40m lire a year will no longer enjoy full coverage under Italy's expensive and wasteful health system.

In an attempt to make Italy's huge army of tax evaders pay their share, self-employed people - considered the worst offenders - will be subjected to a minimum tax based on an average employee's salary. At present many declare incomes considerably lower even than those of their own staff. Evidence of wealth will also be taxed, such as big cars, private aircraft, game reserves and yachts.

Businesses and societies will also have to pay more taxes. Yesterday's measures come on top of a whole package of new taxes and spending cuts announced in July as well as the demand by Mr Amato for special powers to steer the economy in times of danger, such as during the past two weeks.

The package will present the political parties with the crucial test of their ability to tackle the country's crisis and pass the unpalatable measures needed if Italy is to take part in the European economic union - assuming of course that this survives the French referendum on Sunday.

The Italian Senate overwhelmingly approved the Maastricht treaty on European union last night. It must still be approved by the lower house of parliament, agencies report.

Chancellor Helmut Kohl of Germany flew to Florence last night for meetings with Mr Amato today. The leaders would assess the 'strength of European commitment' at a testing time for the Community, an Italian spokesman said. The summit would centre on the workings of the EMS and exchange rate mechanism.