CERNOBBIO, Italy—Italy's government is under increasing pressure to ensure quick approval of key economic austerity measures as time runs out for the country to convince markets it won't be next to fall in the domino-like acceleration of Europe's debt crisis.
At a conference on the shores of Italy's Lake Como, international policy makers and economists criticized the government of Prime Minister Silvio Berlusconi for failing to unveil a definitive version of a €45 billion ($64 billion) austerity package aimed at balancing Italy's budget in two years and breathing new life into the country's anemic economy.
The weightiest call to action came from European Central Bank President Jean-Claude Trichet, who said it wasn't up to his bank alone to solve the Continent's debt woes. And in a sign of growing frustration at the Berlusconi government, several here said it was time for Italy's billionaire premier to step aside and for a temporary nonpartisan government to come to power in order to take tough decisions on behalf of the country. In Italy's recent history, so-called "technical" governments have managed to push through unpopular measures that political, elected administrations haven't—most notably an overhaul of the pension system in 1996.
"The ECB and euro system as a whole consider the measures announced by [Italy's] government...extremely important in order to rapidly diminish the public deficit of Italy and improve the flexibility of the Italian economy," Mr Trichet said during the conference.
Over the past couple of months, Italy has been dragged into the escalating European debt crisis—with the country's borrowing costs surging—mainly on concerns about the country's huge debt, which stands at 120% of gross domestic product. More worrying is Italy's feeble growth rate, which has lagged behind the rest of the euro zone for the past decade and is unlikely to improve unless the country makes key changes, including to its labor market.
Fears about Italy have coupled with a broader disillusionment among investors and policy makers themselves that Europe's politicians haven't been able to put a lid on the debt problems of Greece, which emerged nearly two years ago. The European Central Bank has so far spent €41.6 billion to buy Italian and Spanish bonds in an attempt to stop the downward pressure on their prices.
Under pressure from the ECB, the Italian government several weeks ago quickly unveiled a broad framework of economic measures aimed at improving the country's public finances. Since then, however, the administration has repeatedly flip-flopped on the contents of the economic package, scrapping key measures such as a pension overhaul and a tax on higher incomes.
Critics also say the package doesn't include enough moves to liberalize Italy's economy in order to drive growth.
The government hopes to have the measures approved by mid-September, but a firm schedule hasn't been set yet.
"The budget measures, which have changed two, three times in the space of two weeks, aren't off to a good start," Marco Tronchetti Provera, chairman of Italian tire maker Pirelli & C. SpA, said in an interview at the conference.
Among the recent flip-flopping: The government last month said it would reach a balanced budget by 2013, in part by levying a tax on those earning more than €90,000 a year. Weeks later, those proposals were dropped. Similarly, a plan to change pension-payment rules was put forward and then scrapped in two days.
The confusion has further rattled markets. On Friday, Italy's 10-year government bond yielded 5.237%, 0.23 percentage point wider on the day versus the benchmark 10-year German bund, according to Tradeweb. The five-year credit default swap's spread on the country's bonds widened 0.17 percentage points, to 4%, above its record closing level of 3.85%, according to Markit.
The latest version of the austerity measures focuses largely on cracking down on Italy's rampant tax evasion—something that economists have long urged the country to do. Critics have argued that the measures—which would introduce tougher legal procedures for evaders and would force taxpayers to give more banking information on their tax returns—would be hard to enforce and therefore couldn't guarantee the budget cuts that the government promises.
The Senate and the Chamber of Deputies, the lower-house parliament, are expected to vote on the package by the middle of this month. Before any voting takes place, however, the measures must be approved by the Senate's budget committee.
On Sunday, the budget committee approved one of the most controversial parts of the package: a measure that would allow companies and unions to agree to opt out of labor rules that make it impossible to fire employees without "just cause."
Italy's Economy Minister Giulio Tremonti on Sunday defended the crackdown on tax evaders saying in a speech at the Cernobbio conference that the government expected to collect billions of euros from the measure. Mr. Tremonti unveiled a telling figure, saying that 796 people in Italy declared an income of over €1 million last year and a little more than 3,300 people earned more than €500,000.
Despite the reassurances, the conference, which was organized by think tank Ambrosetti, wrapped up in a sour mood. Several at the conference gossiped about possible candidates for a possible technical government; former UniCredit bank Chief Executive Alessandro Profumo said he was willing to be part of such an interim administration. Non-elected, technical governments in Italy can be created if the administration in power loses a majority in parliament. Though his center-right coalition is increasingly fractured, Mr. Berlusconi still has the majority he needs to govern, and new elections aren't scheduled until 2013.
Emma Marcegaglia, the head of Italy's business lobby, which has been highly critical of the government in recent months, said she was worried that if the measures aren't approved quickly, the ECB may withdraw its support to the country.
"Our concern is that the ECB stops buying Italian bonds if the government doesn't act fast enough," she said. Picking up on Mr. Trichet's warnings the day earlier, she added: "The ECB can't keep buying Italian bonds forever."
—Sabrina Cohen
contributed to this article.
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