Italy's new prime minister, Mario Monti, received the Senate confidence vote after he presented an ambitious growth-boosting programme to take the country out of crisis and called on lawmakers for national unity and responsibility.
"Only if we can avoid being seen as the weak link of Europe can we contribute to European reforms," said Monti, who was sworn in on Wednesday as head of a government of experts after Silvio Berlusconi stepped down last week.
At a time of international financial instability that is threatening the euro, former European Commissioner Monti said his government would work to change Italy’s labour market and pension system, fight tax evasion and make it easier for businesses to grow. But he also warned the EU to understand what is at stake if it leaves Italy to its own fate.
“The future of the euro depends on what Italy does in the next few weeks. Partly, not only, but partly,” Monti said, warning that the end of common currency would heavily hit the EU, its institutions, its institutions and would take the union back to “where we were in the 1950s.”
Monti also said Italians must make sacrifices in the coming months, but pledged that those sacrifices would be fair, and evenly spread. Such measures would involve changes to welfare benefits, including an overhaul of the pension and fiscal systems.
“We need to focus on three pillars: fiscal rigor, economic growth and social fairness,” Monti said.
Monti now faces another confidence vote in the Chamber of Deputies, the lower house, today, which he also expected to win comfortably.
Mass protests in Athens
In Athens, at least 50,000 Greeks marched past shuttered shops beating drums, waving red flags and chanting "EU, IMF out!" as police fired teargas at black-clad youths.
Schools, universities and many businesses stayed shut for the day and public transport was badly disrupted.
Protests came one day after a national unity government, headed by technocrat Lucas Papademos, took office, charged with imposing yet more sacrifices. It is the first public test for technocrat prime minister Lucas Papademos' fractious three-party coalition, who faces a Herculean task keeping his coalition united behind reforms required under a €130 billion bailout aimed at preventing a default.
Eyes shift to Spain, France
Meanwhile investors turned their attention to France and Spain, whose borrowing costs hit the highest level since 1997.
Spain auctioned about €3.6 billion in 10-year bonds yesterday, but had to pay 6.9%, above the 5.4% it paid at a comparable auction in October.
As yields above 6% are considered unsustainable, the euro fell in response. France fared a little better, as it paid 2.8% to sell bonds maturing in July 2016, up from the 2.3%, but the spread between French and German 10-year bond yields, a measure of market confidence, widened to more than two percentage points, the widest since the creation of the euro more than a decade ago.
European Central Bank intervention eased pressure but fears are growing that the euro zone's second largest economy might be next in line to face severe trouble.
Monti yesterday spoke to French President Nicolas Sarkozy and German Chancellor Angela Merkel, who all agreed on the need to accelerate reforms, the three leaders said in a joint statement.
With Italy's borrowing costs now at unsustainable levels, Monti will have to work fast to calm financial markets, given that Italy needs to refinance some €200 billion of bonds by the end of April.
Ireland, which has been bailed out and gained plaudits for its austerity drive, will also have to do more. Dublin will increase its top rate of sales tax by 2 percentage points in next month's budget, documents obtained by Reuters showed.
More ECB action needed
But no amount of austerity in Greece, Italy, Spain, Ireland and France is likely to convince the markets without some dramatic action in the shorter term, probably involving the European Central Bank.
Many analysts believe the only way to stem the contagion for now is for the ECB to buy up large quantities of bonds, effectively the sort of 'quantitative easing' undertaken by the U.S. and British central banks.
France and Germany have argued over whether the ECB should intervene more forcefully to halt the euro zone's debt crisis after modest bond purchases failed to calm markets.