Italy unveils draconian measures as recession looms

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Italy on Sunday unveiled a draconian austerity programme worth 20 billion euros ($27 billion) in a bid to avoid bankruptcy for the eurozone's third largest economy but warned a new recession was looming.

The far-reaching programme included new levies on luxury goods, the re-introduction of a tax on principal residences and cuts to government costs.

The minimum pension age for women will also be increased starting next year and the number of years men must pay pension contributions will be raised.

"This is a decree to save Italy," said Prime Minister Mario Monti, who has come under intense international pressure to implement harsh reforms.

Italy will "put its deficit and debt under strong control" so that the country is "not seen as a suspicious flash point by Europe," he said.

The measures were adopted at a cabinet meeting that had been scheduled for Monday but was brought forward by Monti in a bid to finalise the reforms before financial markets open in a crucial week for the future of the euro.

A European Union summit on Thursday and Friday is being seen as a make-or-break meeting for the 17-nation eurozone, which has been swept by a debt crisis that began in Greece but has now spread across the area.

The Italian cabinet also on Sunday said it was expecting the economy would slip back into recession next year with a contraction of 0.4 to 0.5 percent -- compared to a previous government forecast of 0.6-percent growth.

Monti said that Italians were being asked to make "sacrifices" and said he was renouncing his own salary as prime minister as a gesture of solidarity.

Welfare Minister Elsa Fornero broke down in tears as she outlined severe pension reforms, saying they had taken a "psychological toll" on her.

Monti on Monday will present the measures to the lower and upper houses of parliament, where final approval is expected before the Christmas recess.

A former top European Union commissioner who came to power just three weeks ago after the flamboyant Silvio Berlusconi was ousted by a wave of panic on financial markets, Monti said Italy was at a dramatic crossroads.

"We're faced with an alternative between the current situation, with the required sacrifices, or an insolvent state, and a euro destroyed perhaps by Italy's infamy," he said.

Rome has already adopted two austerity packages this year but the European Commission indicated that it would fail to reach its target of balancing the budget by 2013 without more belt-tightening.