Did Monti give them a raw deal?

By J.H. | ROME

WELL, the markets liked it. Today, after Italy's new prime minister, Mario Monti, outlined a three-year package of fiscal adjustments worth €30 billion ($40 billion), the Milan bourse took wing. Shares closed almost 3% up on the day, by far the best performance among the bigger European stock exchanges.

More significantly, perhaps, the yield on Italian sovereign bonds plunged. The spread over safe-haven German debt securities fell below 400 basis points for the first time in more than a month.

The markets' reaction to Mr Monti's announcement made for an encouraging start to a decisive week for the euro, and indeed the European Union itself. The package has unquestionably put Italy in a stronger position to face the capital markets next year, when more than €300 billion of its €1.9 trillion debt will need to be refinanced.

It contained yet another raft of austerity measures to add to the many already loaded on to Italians by Silvio Berlusconi's government. But Mr Monti also (and for the first time) signalled that he was serious about promoting growth in sluggish Italy. Fully €10 billion of the savings are to be reinvested with this aim. The package includes a tax break aimed at encouraging firms to expand their workforces, a liberalisation of shop opening hours and measures to promote infrastructure development.

Not that results are expected any time soon. Mr Monti's deputy finance minister, Vittorio Grilli (Mr Monti is serving as his own finance minister), said that the government was pencilling in a fall in GDP of up to 0.5% next year, with the outlook flat for 2013.

That, and the risk (noted by Mr Monti) that Italy could go way the way of Greece, will make it harder for Italians to protest at the steps taken by the government. Even so, the draft budget, which was approved in an emergency cabinet session yesterday, arrived in parliament amid widespread dissatisfaction.

There were two main criticisms. Economists and commentators were almost united in decrying the package's heavy reliance on tax increases— €17-18 billion of the total, according to Mr Grilli. The same criticism was repeatedly levelled at measures introduced by the last government under Mr Berlusconi.

A property tax on first houses—a levy abolished by Mr Berlusconi—is to be reintroduced; capital repatriated under a 2009 amnesty is to be taxed for a second time (a questionably retrospective measure); there are proposed new levies on private aircraft and luxury cars and higher excise on petrol. Just to be sure, the government has tucked up its sleeve the possibility of a 2% rise in value-added tax next September.

The cuts are more timid: the scrapping of a few public bodies and the reduction (but not abolition) of the provincial administrations, with the rest of the savings foisted on to regional governments in a manner also reminiscent of Mr Berlusconi's approach.

Though they will not be immediate, significant savings will come from the budget's shake-up of pensions. But that is also a reason for the second main criticism of the package: that, despite Mr Monti's promises of fairness, too much is being loaded on to the poor. It worried not only the trade unions and the centre-left, but also the Catholic church. A representative of the Italian Bishops' Conference said the budget “could have been fairer”.

The government has, in effect, abolished Italy's unique years-in-work system of calculating pensionable age so that, from the beginning of next year, women will be unable to retire before the age of 62 and men before the age of 66. That may not stir much sympathy for Italians in the rest of Europe, where retirement ages are already mostly higher.

But for existing pensioners the budget held a genuinely nasty surprise: only the minimum pensions will be protected from inflation next year. The effect that could have on some of the most vulnerable members of Italian society was acknowledged in dramatic fashion at a press conference when the welfare minister, Elsa Fornero, was overcome by emotion as she announced the decision.

The budget did not include a one-off wealth tax. Nor did it raise the top rate of income tax. But that was because of pressure from Mr Berlusconi's party. It still has the power to bring down Mr Monti's new, "technocratic" government in the Senate. And the budget, though endorsed by the cabinet, has yet to be approved in parliament.