Berlusconi to call emergency cabinet meeting to approve austerity measures

Economy Minister Giulio Tremonti earlier today told parliament he would present the austerity measures - which will be approved by decree - to President Giorgio Napolitano later in the day, but could not discuss them while markets were open.

Berlusconi this week told unions that a cabinet meeting would be called by August 18 to approve the decree.

Italian Economy Minister Giulio Tremonti pledged to meet European Central Bank demands for sweeping economic reforms in exchange for help in shielding Italy from the euro zone debt crisis.

Tremonti told a parliamentary committee that the government was ready to take steps to liberalise the economy but was still working out detailed plans for balancing the budget by 2013.

"We have to pass a very strong fiscal adjustment package for this year and 2012 and for the following year, 2013," he said. "The detailed numbers are currently being worked out.

"The political choice on how to re-focus efforts on 2012 and 2013 is a choice we still have to make," he said, adding that plans would be presented at the next cabinet meeting.

Tremonti said partners including the European Central Bank, which wrote to the government, as well as France and Germany had "suggested and appreciated" the goal of bringing forward budget plans and had also called for extra measures to spur growth.

These included full liberalisation of local public services and the professions, more flexible job contracts, easier hiring and firing rules to free up the rigid labour market and cuts to public sector pay.

In addition, they had proposed increasing the retirement age for women employees in the private sector and a change in rules on when workers can retire based on their pension contributions.

Tremonti said the proposals on hiring and firing and cuts to public sector pay were currently not in the government's plans, but he added that there was a need for action on freeing up the economy as well as cutting the cost of government.

However, confusion over the government's position was increased by Prime Minister Silvio Berlusconi's main coalition ally, who appeared to accuse the ECB of trying to topple the government with its reform demands.

Umberto Bossi, fiery leader of the powerful Northern League party, said the letter the government had received from the ECB appeared to be politically motivated.

"I fear the letter was written in Rome," he told reporters in parliament. "I fear there is an attempt to bring down the government."

He seemed to be referring to Bank of Italy Governor Mario Draghi, who will succeed ECB President Jean-Claude Trichet this year and who was previously widely seen as the potential head of a temporary technocrat government.

"Draghi, instead of being in Europe, is always in Rome," said Bossi.

Bossi's party, whose voter base is in the small business sector and middle classes of the prosperous north of Italy, opposes any cuts to pensions.

Berlusconi, one of Italy's richest men, has ruled out a wealth tax and the CGIL, the largest union federation, threatened strike action if cuts targeted only ordinary Italians, including pensioners.

Italian bond yields have dropped sharply from the 14-year highs they touched last week after the European Central Bank intervened to prop up the market and prevent borrowing costs from spiralling out of control.

However, the continuing tension was underlined on Wednesday when the Milan stock market <.FTMIB> suffered its sharpest one-day drop since the Lehman Bros crisis in October 2008, with the main index falling 6.65 percent.

Markets picked up on Thursday morning when the FTSE Mib index rose 2.44 percent as worries over the stability of the French banking sector eased, sending European bourses higher.

The drastic selloff of Italian stocks and bonds over the past month has put paid to the government's frequently repeated claim to have kept Italy out of the euro zone debt crisis.

The public debt burden, at some 120 percent of gross domestic product, is second only to Greece's in the euro zone but a relatively modest deficit and a generally conservative financial system had shielded it until recently.