ECB gave Berlusconi orders on how to run Italy

Changes to labour laws were largely responsible for the general strike on 6 September
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The Independent Online

The european Central Bank (ECB) told Italy to slash public spending and reform labour laws before intervening to prop up Italian bonds and reduce its borrowing costs, it emerged in a leaked letter suggesting the government kowtowed to EC bankers.

The letter sent to the Prime Minister Silvio Berlusconi on 5 August by the outgoing ECB president Jean-Claude Trichet said the severity of Italy's economic situation made "bold and immediate" action "essential", before going on to demand Italy's budget be balanced by 2013 – a year ahead of schedule – "mainly via expenditure cuts".

The diktat, which was signed jointly with Mr Trichet's designated successor, the Bank of Italy Governor Mario Draghi, also demanded that Mr Berlusconi make radical economic and political reforms, including opening up public services and overhauling pay bargaining and employment rules.

Such changes to the labour laws, subsequently incorporated into this month's emergency budget, were largely responsible for the general strike on 6 September, led by the left-wing CGIL public services union. In particular, new rules making it easier to hire and fire staff infuriated union activists. The section of the ECB letter urging the Berlusconi government to "consider significantly reducing the cost of public employees, by strengthening turnover rules and, if necessary, by reducing wages", might even put some of the more moderate public sector unions on a war footing.

The emergence in yesterday's Corriere della Sera newspaper of the ECB missive – marked "strictly confidential" – brought fresh political embarrassment for Mr Berlusconi as he attempted to celebrate his 75th birthday.

The ECB has always rejected suggestions that its bond-buying programme was linked to demands for austerity cuts. But the publication of the letter suggests otherwise – and opposition politicians were quick to seize on it as further evidence of the Berlusconi government's weakness in the face of the financial storm ranging across the continent.

Experts noted that despite blowing billions of euros on Italian bonds to keep its borrowing cost down, the ECB's measures have failed to have much effect. Currently, Italy is burdened by Europe's second-biggest debt, which at €1.84trn (£1.6trn) is roughly equal to the value of the state's total assets.

Many analysts have claimed Mr Berlusconi's precarious political position, and the inability of his government to act decisively in parliament due to a slim and fragile majority, are adding to market fears over Italy.