New market chaos likely over fear for France and Italy's future
Investors are braced for another volatile week in the markets amid criticism of Italy's second austerity package and lingering concerns about a possible downgrade of France's credit rating.
Italy's second austerity package in less than a month met with a chorus of criticism a day after becoming law, with the largest union federation threatening a general strike over the "injustice" of the measures.
Italy's president Giorgio Napolitano signed the emergency decree to cut the fiscal deficit by €45.5bn and balance the budget in 2013, a year ahead of its previous schedule. But it hasn't convinced the markets.
"A missed opportunity," was how Pier Carlo Padoan, the chief economist of the Paris-based Organisation for Economic Co-operation and Development, described it yesterday.
Mr Padoan said the plan was positive in the pledge to bring forward the balanced budget but it lacked measures to boost growth and tackle tax evasion. Employers' lobby Confindustria estimates Italy's tax evasion totals €120bn.
CGIL union confederation leader Susanna Camusso says the package "hits only those who already pay their taxes", adding that the date of a general strike is to be decided at an emergency union meeting on August 23.
The austerity plan sets a "solidarity tax" on those earning more than €90,000 a year for three years. Economists, unions and business leaders agreed a tax on wealth rather than on labour income would have been better because it would have targeted tax evaders who do not declare their real income but often own large assets.
Former European commissioner Mario Monti criticised the package, saying it lacked fairness, weighed too heavily on the middle classes and did too little to help growth.
The austerity decree must be passed by parliament within 60 days, during which it will almost certainly be amended. Some €4bn of the €20bn of savings targeted for 2012 and €12bn of the €25.5bn for 2013 are to come through tax and welfare measures still to be drawn up.
French economist Jean-Paul Fitoussi said market pressure had forced Italy to take steps that were of no real value. "Italy is like the protagonist of a Greek tragedy: forced to do things that will be useless and damaging in the long run, but necessary for survival in the short run."
Meanwhile, a member of German chancellor Angela Merkel's council of economic advisers, Lars Feld, warned that France's AAA rating was at risk of a downgrade in the medium term.
Mr Feld said France's debt ratio to its gross domestic product was too high and cited its budget deficit that was "significantly" higher than in Germany. Germany also has an AAA rating.
The European Union rescue fund would have to be restructured if France's rating was cut, probably resulting in higher costs for Germany, he said. (Additional reporting Reuters and Bloomberg)