Italy unveils its prescription for EMU status

The Italian government yesterday unveiled a package of budgetary pain aimed at meeting criteria for European monetary union on time but the measures looked more like accounting tricks than real cuts and highlighted the growing weakness of Italy's attempt to be included in the European A-stream.

Romano Prodi, the Prime Minister, said the 15.5 trillion lire (pounds 6bn) package would bring the budget deficit down to 3 per cent of Gross Domestic Product by the end of the year and thus qualify the country to join the single European currency.

But the mini-budget barely survived the horse-trading between governing parties and offered no significant structural changes to an economy the European heavyweights believe is too backward to be included in EMU even if Italy meets the statistical criteria on time.

Giulio Tremonti, the leading economic specialist in the opposition, called the package "a bunch of accounting tricks".

An important part of the package relies on raising taxes on corporate severance funds two years early and delaying end-of-contract settlements to state workers - in other words, fiddling with the timing but leaving the substance of state income and outgoings untouched.

"These are largely one-off measures that will work for this year but will fall off again in 1998," commented Ros Lifton, of HSBC Markets in London.

Most analysts had expected Mr Prodi to raise new revenue by cutting into pensions and social security.

But that was vetoed by the far-left party Rifondazione Comunista, which holds the balance of power in parliament.

Its leader, Fausto Bertinotti, at one stage threatened not to support the budget cuts at all, saying the pain was unnecessary, since Italy was effectively frozen out of the first stage of monetary union already.