Spain, Portugal set tone as austerity sweeps Europe

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Austerity measures in Spain and Portugal have spurred belt-tightening in Italy, France and Britain, countries that so far have been largely spared from the effects of Greece's crisis, analysts say.

"There really is no choice: deficits are unsustainable in every country," Franco Bruni, monetary policy professor at Milan's Bocconi University, told AFP.

The "draconian" steps by Madrid and Lisbon "put pressure on Italy" even if its situation is not nearly as dire, said Marco Valli, chief economist for Italy at Unicredit.

Rome said last week that it would need to add some five billion euros to the 20 billion euros (25 billion dollars) it planned to trim from 2011-12 spending in order to lower the deficit to 2.7 percent in 2012.

Prime Minister Silvio Berlusconi's centre-right government has managed to rein in Italy's public deficit, which in 2009 stood at 5.3 percent of gross domestic product, compared with 9.4 percent in Portugal and 11.2 percent in Spain.

But the government is planning to freeze public sector salaries for a year, while continuing to slash ministries' budgets and stepping up its fight against tax evasion, press reports say.

Cabinet minister Roberto Calderoli of the populist Northern League party said Friday he would propose salary cuts of "at least five percent" for Italy's ministers and lawmakers.

Portugal on Thursday ordered deep wage and spending cuts along with higher taxes to slash the public deficit by more than half.

Prime Minister Jose Socrates announced a hike of one basis point in value-added tax, higher profit taxes for big businesses and a five-percent salary cut for elected officials.

A day earlier, Spanish Prime Minister Jose Luis Rodriguez Zapatero announced a raft of measures totalling 15 billion euros including cutting civil service pay by five percent.

On Friday the Madrid government said it was also considering taxes hikes to help slash the public deficit.

The cuts are on top of a 50-billion-euro austerity package announced in January that was designed to slash public deficit to the eurozone limit of three percent of GDP by 2013 from 11.2 percent last year.

After debt-laden Greece, Spain has been named along with Portugal as a potential new weak link in the eurozone.

In Britain, among the first steps taken by new Conservative Prime Minister David Cameron on Thursday was to order a five-percent salary cut for cabinet members.

For his part French Prime Minister Francois Fillon last week announced a three-year freeze on public spending, but rejected opposition and union accusations that the government had adopted austerity measures.

President Nicolas Sarkozy on Friday echoed Fillon's assertion that the measure was aimed at reining in a soaring budget deficit.

In Italy, while a tax hike seems out of the question, the government said Thursday it would withhold development funds from four regions running large healthcare deficits, telling them to raise local taxes.

But Italy's public debt, at 115.8 percent of GDP, remains among the highest in the world. And it is expected to reach 118.4 percent in 2010, according to finance ministry estimates.

The European Union's poorly enforced Stability and Growth Pact was meant to limit public deficits to three percent of GDP, and debts to 60 percent of output.

© 2010 AFP

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