As Italy struggled to unravel its debt crisis yesterday (14 July), Economy Minister Giulio Tremonti unequivocally compared the euro crisis to the sinking of the Titanic. Across the ocean US President Barack Obama struggled to avoid a debt default by the world’s largest economy.
Italy’s austerity budget passed a first hurdle in parliament, but the opposition says Prime Minister Silvio Berlusconi’s government is a shambles and should resign after it is finally approved.
The four-year package, which has been increased to 48 billion euros from 40 billion euros in the last 24 hours, is aimed at balancing the budget by 2014.
The upper house approved it by a margin of 161-135. It is due to be approved by the lower house Chamber of Deputies today and signed into law several hours later.
Italy has avoided the worst of the financial crisis thanks to strong controls on public spending, a conservative banking system and a high level of private savings.
But with Greece and Ireland both in trouble, markets have been unnerved by a public debt level that is among the highest in the world at 120% of gross domestic product.
Addressing the Senate shortly before the vote, Economy Minister Giulio Tremonti said Europe needed a political solution to the unraveling debt crisis because no country would be spared dire consequences.
“No-one should have any illusions of individual salvation. Just like on the Titanic, not even the first class passengers will be saved,” he said, referring to Europe’s stronger economies.
The Democratic Party (PD), the largest opposition group, has demanded the resignation of Berlusconi’s government, saying it is too weak to face up to the storm on financial markets.
But instead of aiming for potentially traumatic early elections immediately, the PD and other opposition forces have floated the idea of a transitional government to lead the country to the scheduled elections in 2013.
Berlusconi, who has steadfastly refused to resign despite a sex scandal and corruption trials, has emerged bruised from this week’s financial crisis during which he has kept a low profile.
After attacking Tremonti in a newspaper interview last week which highlighted persistent cabinet divisions, he has not appeared in public to speak about the market turmoil
The opposition has demanded Berlusconi play no role in any transitional government and Tremonti has been touted by some as a possible key member, perhaps even as prime minister.
Uphill battle for Obama
In the meantime, US President Barack Obama suspended the federal budget negotiations for the day on Friday to give congressional leaders a chance to come up with a “plan of action” on how to unblock talks meant to cut deficits and avert a debt default.
Obama, who had vowed to meet top lawmakers every day until a deal is reached to raise the US debt limit, gave top Democrats and Republicans until Saturday morning to reconsider their positions in the high-stakes negotiations.
Republicans are pressing for at least $1 in spending cuts for every $1 that the $14.3 trillion debt ceiling is lifted, and say the white House needs to get serious about reducing spending to properly address the debt problem.
Democrats are open to certain cuts but want some tax increases and other revenue-builders to be included in any deal so that the burdens of the austerity are shared.
Obama thinks a deal worth $2 trillion could be feasible if both sides bend a bit, officials familiar with the talks said.
“It’s decision time. We need concrete plans to move this forward,” Obama said on the fifth straight day of debt negotiations on Thursday, according to a Democratic official.
US default on 2 August?
Financial markets are starting to worry that Republicans and Democrats are too far apart to reach a major budget agreement by 2 August, when the United States would run out of money unless the cap on government borrowing is raised.
Obama, who is running for re-election in November 2012, has rejected the idea of a stopgap or short-term agreement that would require the debt ceiling to be raised again next year.
“A short-term solution is not something I will sign,” he said on Thursday.
Compromises required for such a deal could be awkward for both Democrats and Republicans as the 2012 campaign heats up.
But a failure to raise the debt ceiling stands to hurt the fragile US economy and reverberate worldwide, driving up interest rates and shaking currency, equity and bond markets.
The debt negotiations may resume over the weekend.