Italian Senate chooses austerity rather than risk a run on euro

The measures were passed 161-135 in a vote of confidence called by Premier Silvio Berlusconi’s government.

The fast-track approval of the increased package – which was due for a final vote in the lower house of parliament yesterday – came after this week’s markets dive as worries grew over Italy’s financial stability.

The extent of investors’ fears was apparent in a debt auction yesterday, when Italy saw its borrowing rates hit a record high in a sale of 4.96bn euros (£4.36bn) in five- to 15-year bonds.

Italy is under pressure to show markets it can bring its accounts in order and promote growth, or risk being dragged into the debt crisis that has hit Greece, Ireland and Portugal.

Finance Minister Giulio Tremonti told the Senate the package, which was strengthened by reducing tax breaks in 2013 and 2014, seeks to balance the budget by 2014 and contains 16 measures to spur growth. He said: “Without the balanced budget, the monster of debt, which comes from the past, would devour our future and that of our children.”.

While Italy’s debt is among the highest in the eurozone at nearly 120 per cent of GDP, poor growth is viewed by many as the overriding issue.

Tremonti said that credits for research, reforms to civil justice and measures to promote tourism and help young entrepreneurs would bolster economic growth.

High-pressure talks, meanwhile, have been continuing in the US, where President Barack Obama bluntly told Republican congressional leaders they must compromise quickly if the government is to avoid an unprecedented default.

He told Republicans, “Don’t call my bluff” by passing a short-term debt limit increase he has threatened to veto.

Republicans are demanding deep spending cuts as the price for allowing a debt limit increase to pass but negotiations have bogged down over Mr Obama’s demand for tax increases they say they will not accept.

But with a threatened default less than three weeks away, Moody’s Investors Service announced it was reviewing the US bond rating for a possible downgrade, and the Treasury said the annual deficit was set to exceed $1 trillion for the third year in a row.

With the negotiations at a seeming standstill, Republicans drew a warning from the party’s Senate leader, Senator Mitch McConnell who warned that a potentially catastrophic failure to raise the US debt limit would probably ensure Mr Obama’s re-election next year.