Catherine Hornby

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Austerity in the dock as Europe’s debt-stricken leaders meet

September 25, 2012

(Reuters) – The leaders of countries at the center of the euro zone debt crisis met in Rome on Friday after steep upward revisions to Italy’s public debt targets raised growing doubts about the austerity policies being pursued.

“Prime Minister Monti has been very pragmatic in what he set out here, clearly he has raised the question of the extent of austerity which can be applied in Italy,” Irish Prime Minister Enda Kenny told reporters when asked about Italy’s new targets.

Italy said on Thursday that its recession would be much deeper than previously forecast and virtually abandoned plans to cut the debt in the near term, forecasting the debt-to-GDP ratio at 120 percent in 2015, the same level as posted last year.

“The government should recognize that only focusing on fiscal rigor is continuing to worsen our crisis and that it must pursue different policies,” said Susanna Camusso, head of the country’s largest trade union, the left-wing CGIL.

Monti, an unelected economics professor, replaced Silvio Berlusconi last November and rushed through more than 20 billion euros of austerity measures to head off a debt crisis.

However, the measures have sapped consumer morale and deepened the recession in the euro zone’s third largest economy, eating into tax revenues and pushing up the deficit as a proportion of output.

Credit Suisse economist Gianluca Zanni welcomed the deficit hikes as a sign that austerity is finally going out of fashion.

“It’s good, it seems that they want to ease back on the restrictive policies, which is what we are beginning to see at the European level,” he said.

Monti met separately with Kenny and the leaders of Spain and Greece at a gathering of European Christian Democrat leaders.

All four economies, in what is often referred to as the euro zone’s “periphery,” have buckled under tough austerity measures used to tackle debt problems. Italy, Spain and Greece are mired in recession, whileIreland is showing slightly more resilience.

Greece and Ireland have been bailed out by their euro zone partners, Spain has received aid for its banks and is under pressure to seek broader help to lower its borrowing costs.

If it does so, the pressure will rise on Italy, which faces an uncertain election by next spring, to follow suit.

“The severity of the downturn is making the politics of austerity and structural reform all the more difficult at a time when there is growing uncertainty about the Italian political scene,” said Nicholas Spiro, head of Spiro Sovereign Strategy.

Ratings agency Fitch said Italy’s deteriorating economy and finances would not lead to a review its A- sovereign debt rating in the near term, and German Finance Minister Wolfgang Schaeuble said he “firmly hoped” that Italy would continue on the path chartered by Monti after the elections.

Italy forecast on Thursday that the economy would shrink this year by 2.4 percent, twice as much its previous projection, and said recession would continue in 2013. It raised its budget deficit forecast to 2.6 percent of output from 1.7 percent, and more than tripled the 2013 goal to 1.8 percent from 0.5 percent.

The government also hiked its forecasts for the public debt, the second highest in euro zone as a proportion of output after Greece’s, and said even the new goals will depend on managing to sell around 15 billion euros of state assets every year.

(additional reporting by Giulio Piocaccari and Noah Barkin, writing by Gavin Jones; Editing by Toby Chopra)

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