DECEMBER 7, 2010, 3:40 P.M. ET.

Italian Parliament Approves $33.3 Billion in Spending Cuts


ROME—The Italian parliament on Tuesday approved €25 billion ($33.3 billion) in budget cuts over the next two years, locking in austerity measures aimed at stabilizing public finances and reassuring jittery sovereign debt markets.

The approval of Italy's two-year spending budget comes at a crucial moment, placing Italy's fiscal house in order as lawmakers brace for political turbulence in the weeks ahead. The government of Prime Minister Silvio Berlusconi faces a confidence vote in Parliament on Dec. 14 that could bring down his government and pave the way for early elections in the spring.

The vote in the Italian Senate on Tuesday, however, guaranteed that billions of euros in crucial spending cuts will be implemented, ranging from reductions in government funding to regions and cities as well as freezes and wage cuts for public-sector workers. The budget had already received the approval of the Chamber of Deputies, the lower house of Parliament, in November. "We've done our duty," said Renato Schifani, president of the senate, after the votes had been tallied.

The cuts addressed potential concerns from investors who are scrutinizing Italy and other countries on the periphery of Europe for signs of fiscal weakness.

Earlier this month, the European debt crisis briefly washed up on Italy's shores, driving Italian bond spreads over German bunds to new highs on fears that Italy might be down the line in the continent's domino-like bailout wave. The panic was unrelated to fundamentals: Italy's deficit as a ratio of gross domestic product is below the European average; there was no real-estate boom and bust, and the banking system is, so far, considered relatively sound. Rome also started chipping away at the high cost of its state-pension spending years ago. However, Italy does have one of Europe's highest levels of debt at €1.8 trillion, equivalent to 118% of gross domestic product this year. Yet concerns over its refinancing are somewhat mitigated by the fact that about half of it is in the hands of Italians.

Even the looming political crisis isn't considered too big a liability. If Mr. Berlusconi loses the confidence vote next week, Italy's president will decide whether to call early elections or to cobble together an interim government to lead the country until the end of parliament's five-year term in 2013. In that case, Economy Minister Giulio Tremonti is likely to play a role—and so not much of a change is expected in fiscal policy.

Still, economists and business leaders say Europe's third-largest economy has deeper structural issues to address, including lagging growth and competitiveness. Over the past decade, Italian gross domestic product has increased at a meager annual average of 0.54%, and the Treasury forecasts just a 1% rise in 2010 after a 5.1% drop in 2009.

According to an October report by McKinsey and Co., Italy's productivity —measured as GDP per hour worked—is 24% less than that of the U.S. and 10% less than the average of the 15 core countries of the European Union. One of the problems, according to McKinsey, is the size of Italy's businesses, which are too small to benefit from economies of scale and to invest heavily in research.

Italy's labor market is also to blame. The participation of women and young people in the Italian workforce is among the lowest on the Continent. Those who do work are divided into two camps: those with cushy, long-term work contracts and those who hop around from one short-term contract to another. Companies have long complained that Europe's traditional cradle-to-grave contracts—which make it next to impossible to fire workers even during major downturns—provide a disincentive to hiring. Over the past decade, Italy, like many other European countries, has tried to modernize the labor market by introducing new, flexible contracts encouraging companies to hire.

The proliferation of short-term contracts, however, is proving a drag on broader labor productivity, says Marco Valli, an economist at Unicredit Bank. "The problem is that companies abuse short-term contracts, taking on many people for a short time and not investing in their development properly," he says.

Giovanna Ricciuti is a case in point. Since she graduated with a political-science university degree two years ago, the 27-year-old has held a patchwork of jobs—including at the Italian consulate in Sydney, a tourist gift-box company, a wine lobby and a nongovernmental organization that works on malnutrition in Africa—all on three-month contracts at a time.

"I never feel like I'm really part of anything," says Ms. Ricciuti, who moved from her hometown of Potenza to seek work in Rome. "And it's harrowing because I never know how much longer I'm going to be able to pay my rent."

Write to Stacy Meichtry at and Alessandra Galloni at ... rkets_main