Why is Italy into trouble anyway? (II). Berlusconi chooses for €47 bln cutbacks, but I doubt if it will matter.

Yesterday, hours after I finished the first part of this series, I read in the news that President Silvio Berlusconi of Italy wants to make a cutback of €47 bln in three years.

His aim is to bring the budget deficit back from 4.6% of GDP in 2010 to 0.2% in 2014. The FT writes about it. Here are the pertinent snips:

Italy's government agrees austerity package

Italy's centre-right government said on Thursday it had reached agreement on an austerity package designed to eliminate the budget deficit by 2014.

The plan, which officials said amounted to some €47bn of cuts and projected increases in tax revenues, is to be passed by decree but must be approved by parliament within 60 days to remain in force.

Silvio Berlusconi, prime minister, insisted there had been "broad agreement" on the three-year budget during a lengthy cabinet meeting and he called on the opposition to support the measures in parliament where the ruling coalition has a slim majority.

"There is a need for unity in defence of our common currency," a grim-looking Mr Berlusconi told a news conference. He cut short questions from reporters, saying ministers were tired after the long meeting.

Susanna Camusso, leader of the main leftwing trades union federation, called the planned cuts "social butchery". Pier Luigi Bersani, leader of the opposition Democrats, said it was a "time-bomb".

Government insiders said Giulio Tremonti, finance minister, had come under intense pressure to water down the budget with some colleagues seeking his resignation in order to avert a package they saw as undermining the coalition's chances of winning a second term in elections that must be held by early 2013.

With few details of the cuts made public, it was not clear what concessions Mr Tremonti might have granted. At one point the cabinet meeting was reported to have been suspended over the issue of cuts to political subsidies, which includes parties.

Italy's public debt is projected to peak at 120 per cent of GDP this year, second only to Greece in the eurozone. Rating's agencies have threatened to downgrade Italy unless it gets to grips with spending cuts and boosts anaemic growth levels. The yield gap between 10-year Italian bonds and their German equivalent reached euro-era highs on Tuesday, but later narrowed.

Mr Tremonti said a country running a budget deficit was also exhibiting a deficit of responsibility. "This is a political, civil and moral choice," he said, adding that Italy was already on track to reduce its deficit to 2.7 per cent in 2012 from a projected 3.9 per cent this year.

I will not deny that €47 bln in three years is a substantial cutback, even for a country like Italy. But if you compare this to the staggering €1.697 trn in national debt of Italy and think that this debt amount might rise with a €28-odd bln in 2011 alone, then the €47 billion is nothing more than a slight beginning.

Then it is a shame to read that Finance Minister Giulio Tremonti has become under heavy pressure to water down the budget cuts and that the opposition was talking of 'social butchery'.

What I want to add to the Italian opposition, is that the financial markets are already dancing on the economic grave of Italy and that these bleeding-heart cutbacks are not even close to what is necessary to get Italy out of misery.

Yesterday, I stated that I was optimistic on the chances of survival of Italy, but politically and from an economic's point-of-view, a lot need to be changed there.