The plan behind Italy's austerity measures

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The plan behind Italy's austerity measures

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Making the sums add up while global markets fix their nervous gaze on the euro zone’s third largest economy. That is the task for Italy as it aims to reduce the country’s deficit by more than 54 billion euros over three years.

The country has reached this point because of its high debt levels and poor growth. On Tuesday the Treasury raised 3.86 billion euros from the sale of five year bonds but it had to pay an interest rate of five point six percent, a euro zone record high. That crystallised the problems in a chronically stagnant economy.

So what is the plan? It is reckoned the biggest source of income will come from financial cut backs and tax rises.

Upping VAT by one point to 21 per cent is reckoned to be worth over four billion. A clampdown on tax evasion with councils empowered to track down fraudsters should swell the coffers by almost four billion.

The tax hikes will include targeting the rich, a three per cent contribution on income above 300,000 euros. There will also be an increase in tax on financial gains up to 20 per cent against 12.5 per cent previously, except for government bonds.

Will the measures quell the markets’ doubts that Rome can keep control of its 1.9 trillion debt pile with a growth forecast of just one per cent?

And what of the initial optimism that China was about to invest? “If the Chinese are willing to invest, God bless them. But the fact we had to go there to China asking for money is not a good sign,” said Sergio Marchionne, Chief Executive of Fiat, the country’s largest manufacturer.

The focus is not just on Italy. As one analyst said: “it is the last window of opportunity before a serious prospect of a meltdown of the euro”.