Italy's new government unveiled austerity measures that European leaders and markets hope will form the first part of a wider European deal this week and mark a turning point in the battle to save the euro.
Italian Prime Minister Mario Monti, in his first test since taking office two weeks ago, outlined a three-year plan made up of €30 billion ($40.2 billion) in tax increases, spending cuts, pension overhauls and growth-boosting measures.
The package—equivalent to 1.9% of Italy's €1.6 trillion gross domestic product—will likely be followed by Franco-German proposals on Monday to create a new regime for budget policies in the euro zone, which European leaders could adopt at a summit on Dec. 8-9.
Leaders hope a deal could pave the way for a massive European Central Bank intervention in government bond markets that is aimed at stopping the exodus of private capital and reversing the rise of countries' borrowing costs to ruinous levels.
The unraveling of Italy's bond market, one of the world's biggest, amid a vicious circle of rising borrowing costs and investor flight has become the biggest single threat to the survival of the euro. If Italy is unable to refinance its huge debts in the coming year, the rest of Europe would struggle to prop up the country for long, even with help from the International Monetary Fund.
"Italians are to blame for our public debt, and we risk compromising everything we've accomplished in the past 60 years," Mr. Monti told a news conference, adding that he had decided to not accept a salary as premier and economy minister.
The Italian government's proposals will face intense scrutiny as the premier seeks to convince investors and European authorities that the planned measures have the firepower to revive Italy's stalled economy and pay down the country's €1.9 trillion debt.
"On the whole—considering that Monti's cabinet has been in place for 18 days or so—this package amounts to a valid and rapid first step in the right direction," said Vladimir Pillonca, an economist with Société Générale.
While Mr. Monti convenes with European leaders in Brussels, he will face a delicate balancing act back in Rome as his government presses Parliament to overcome months of political gridlock to swiftly approve the proposals.
That won't be an easy task, because Italy's political parties are highly divided over how to snap Italy's economy out of its decade-long funk. Italy's powerful unions, meanwhile, are strongly opposed to any radical changes to the country's costly pension system.
Under Mr. Monti's plan, the retirement age for women with private-sector jobs would be raised by 2018 to 66 years old, from 60 today, a change that would align the retirement ages of men and women. Labor Minister Elsa Fornero broke into tears during the news conference, saying the pension changes were necessary to avoid "collective impoverishment."
European and U.S. leaders fear that the shock waves from any Italian debt default could trigger a financial and economic meltdown in Europe and push the global economy into recession.
European governments are discussing ways to beef up their bailout resources in case Italy or Spain need aid—including a proposal for bilateral loans from euro-zone central banks to the IMF that officials say is gaining traction, even in aid-skeptical Germany.
But most economists believe only the ECB, which can create euros without limit if it chooses, now has enough financial firepower to persuade investors that Italy will stay liquid.
ECB President Mario Draghi signaled last week that the bank might step up its firefighting role, provided governments move first to show their commitment to fiscal discipline. Mr. Draghi's response to any deal among EU leaders by Friday will be closely watched.
German Chancellor Angela Merkel visits French President Nicolas Sarkozy in Paris on Monday to finalize a common Franco-German line ahead of the EU summit later in the week, when EU President Herman Van Rompuy is expected to present proposals for amending the EU treaty to allow stricter euro-zone governance.
U.S. Treasury Secretary Timothy Geithner will be among those attending some of the other talks among European leaders this week, in a sign of the growing fears in Washington that the euro-zone crisis could batter a fragile global economy.
Many observers have dubbed the next five days a "make-or-break" week for the euro—just like several previous bursts of political activity in Europe, most recently in late October and early November. Those summits, like earlier "grand bargains" this spring and summer, disappointed financial markets' hopes for a game changer.
Economists say a new deal between governments and the ECB, swapping binding budget rules for greater bond-market intervention, could at least avert a near-term financial crash and buy time to put the euro on a more stable footing.
Many of the issues bedeviling the euro zone—including the long-term economic imbalances between euro nations that have led to the buildup of unsustainable public and private debts—are too deep-rooted to be solved by this week's summit.
In Italy, for example, public finances have been starved over the decades by endemic tax evasion that Mr. Monti on Sunday proposed combating with measures including a ban on cash payments above €1,000. His plan also calls for a one-time 1.5% tax on the billions of euros Italians repatriated under a tax amnesty adopted by the former conservative government led by Silvio Berlusconi.
The government also unveiled €10 billion in stimulus measures aimed at spurring Italy's slow-growing businesses and fighting the country's sky-high youth unemployment, which stands at 29%. Under the plan, companies would receive as much as €2 billion in tax breaks if they boost hiring, particularly among young workers and women.
Deputy Economy Minister Vittorio Grilli said he expected Italy's gross domestic product to contract by as much as 0.5% next year.
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