11/11/2011 07:36 EST | Updated 01/11/2012 05:12 EST

Italy Senate OKs economic reform bill, indications grow for Monti to head new gov't

ROME - Italy's Senate approved economic reforms demanded by the European Union on Friday, the first step in paving the way for Premier Silvio Berlusconi to resign as early as this weekend and a transitional government to be formed.

The 156-12 vote took place after respected economist Mario Monti — widely expected to become the interim prime minister — was welcomed with sustained applause in the Senate chamber, where he was officially designated senator for life.

Italy's eagerly awaited political transition is expected to happen Saturday, when the lower chamber of parliament also votes on the reforms. It will follow a similar power shift in Greece, where a technocratic government this week took over under the leadership of former banker Lucas Papademos.

The hope is that politically neutral governments will have the strength to push through deeply unpopular and painful economic reforms needed to reduce the two countries' massive debt loads.

After weeks of political deadlock in Rome and Athens, investors were this week fearing the worst — a Greek-style crisis in Italy that would tear apart the 17-nation euro currency union and shake the global economy.

Market sentiment improved on Friday, with the benchmark 10-year borrowing rate down to 6.48 per cent — a sharp retreat from the dangerous levels above 7 per cent hit earlier this week.

However, the measures will not be enough to revive long-dormant economic growth and are only one step in a long series of tough decisions Italy will have to make.

They raise the retirement age to 67 starting in 2026 and call for the sale of state-owned real estate and the privatization of some municipal services. But significantly, they contain none of the painful labour market reforms, such as making it easier to fire workers, that have been strongly opposed by unions.

The legislation now passes to the lower Chamber of Deputies, which is expected to vote by Saturday. A Cabinet meeting has been scheduled immediately after the vote, suggesting Berlusconi might tender his resignation then.

While many politicians appeared to be rallying around Monti to head a post-Berlusconi government, divisions remained within Berlusconi's party and among his allies over whether to support him and under what terms.

President Giorgio Napolitano, who must consult with all main political parties before deciding on how to proceed once Berlusconi steps down, called for politicians to act with a sense of responsibility.

He stressed "the need for the pledges that Italy has made and the decisions it must take to be translated quickly into shared and efficient government action," a statement from his office said.

Italy is under intense pressure to prove it has a strategy to deal with its debts, which stand at €1.9 trillion ($2.6 trillion), or a huge 120 per cent of economic output. It has to rollover a little more than €300 billion of its debts next year alone. But economic growth is weak and the government failed to enact reforms to revive it over the past decade.

Transport Minister Altero Matteoli said Friday he still believed early elections were the best option — despite widespread belief that a months-long electoral campaign was the last thing Italy needs right now.

"I don't believe markets should decide governments," he told Italy's Sky TG24. "In a moment of crisis it should be voters who decide the problems of a country."

But other members of Berlusconi's party have thrown their support behind Monti as have many in the opposition. The Northern League, whose support to Berlusconi has been key over his two decades in public life, remained opposed but seemed almost resigned by Friday afternoon to the reality of a broad-based Monti government.

"We are absolutely opposed to a government that didn't come from the ballot box, so we'll be the opposition," the ANSA news agency quoted Northern League Cabinet minister Roberto Calderoli as saying.

Monti, a former European competition commissioner and current head of Milan's respected Bocconi University, nevertheless received a sustained round of applause when he entered the Senate chamber Friday morning ahead of the reform vote.

"Our warmest and most cordial welcome," Senate president Renato Schifani told Monti after proclaiming him senator for life, an honorific reserved for the handful of Italians who have most contributed to Italian society.

Monti has won kudos from across Italy's political spectrum and abroad specifically because he has defied being affiliated with the right or the left, said Thomas Klau of the European Council of Foreign Relations, who has known Monti since his days on the Europe Commission.

"The first thing he can bring to Italy at this juncture is his deep understanding of both the economic dynamics and political dynamics in Europe," he said. "His intellectual leadership and authority are recognized across Europe, and that in itself would offer a salvatory contrast" to Berlusconi.

The reforms call for the sale of state-owned real estate, the privatization of some municipal public services and offer tax incentives to companies that hire young workers in a country where the unemployment rate for people aged 15-24 hovers around 25 per cent.

European Council President Herman Von Rompuy will hold talks with Berlusconi on Friday night — a visit that was scheduled before the premier's pledge to resign. News reports said he would also call on Napolitano, a clear sign of the EU's keen interest in the next steps of Italy's transition.

In Athens, the new government under Papademos must ensure passage of Greece's latest debt deal — a €130 billion ($177 billion) agreement reached by the European Union on Oct. 27. It will also need to keep up the pace of austerity measures to keep qualifying for payouts from a previous bailout package.

Without the next installment of loans, which fellow eurozone countries had frozen amidst the political chaos, Greece will go bankrupt in December.

The government of Papademos, a former European Central Bank vice-president, will keep Evangelos Venizelos still in place as finance chief while the other posts were split between the country's main parties.


Elena Becatoros in Athens contributed to this report.