Italy tonight pledged to work for a constitutional amendment requiring the government to balance its budget in a bid to ressure domestic and foreign investors that its finances are sound.
At a hastily convened news conference, Finance Minister Giulio Tremonti said Italy aims to balance its budget in 2013, a year ahead of schedule.
Premier Silvio Berlusconi announced that G7 finance ministers will meet "within days" of the exploding financial crisis.
Berlusconi said he was expecting a phone call tonight from US President Barack Obama about the global economic woes.
Italy's borrowing costs rose above Spain's for the first time in more than a year, pushing European leaders to interrupt their holidays and look for a response to deepening fears about the health of the eurozone's No. 3 economy.
At the start of Europe's debt crisis 21 months ago, Italy was rarely grouped with the weaker members of the single currency zone, such as Greece, Ireland and Portugal. Many in the markets thought Spain, with its 20% unemployment rate, was vulnerable.
But the emergence of Italy as a potential victim over the past few weeks has highlighted just how vulnerable the eurozone is and how insufficient its anti-crisis measures are.
The yield on Italy's 10-year bond stands at 6.09 %, ahead of Spain's equivalent of 6.04 % - though both are lower than the euro-era highs earlier in the week and markedly below where they were at the start of the day, they're still not far from the levels that forced Greece, Ireland and Portugal to seek international financial help.
Worries that Italy and Spain maybe next in line led German Chancellor Angela Merkel, vacationing in the Italian Alps, and French President Nicolas Sarkozy, on the French Riviera, to take time from their summer holidays for a phone conference on the eurozone crisis. Spanish Prime Minister Jose Luis Rodriguez Zapatero spoke with Sarkozy and Berlusconi in separate phone conversations Friday.
Their options to what a leading EU policymaker described as "incomprehensible" movements in the markets appear limited.
Even a better-than-expected US jobs report today failed to ease the pessimism that has gripped investors over the past few weeks.
It's only been two weeks since eurozone leaders agreed to expand the powers of its €440bn rescue fund that helped bailout Greece, Ireland and Portugal. The fund will be able to buy governments bonds and bail out banks, but the new powers will not be in place until parliaments approve the changes in September.
Analysts also warn that the fund is currently not big enough to rescue Italy, whose debt amounts to 120% of economic output, around double that of Spain. Only Greece has a bigger proportion to service in the eurozone.
Markets have put increasing pressure on Italy because of its chronically weak growth and a general lack of confidence in Berlusconi's ability or willingness to push through politically difficult measures to make the economy more productive.
Finance Minister Giulio Tremonti, who stood beside Berlusconi at the news conference, said a balanced budget could be achieved by 2013 by speeding up reform of Italy's extensive, and expensive, social welfare system, which includes national health care and generous retirement payments.
Also key to this goal, Tremonti said, would be what he promised as the "mother of all liberalisation," especially in Italy's highly regulated world of labour.
"The principle that all will be allowed unless specifically forbidden" by labour laws will be the guiding principle of the government's strategy, Berlusconi said.
Industrialists and mid-sized employers have complained for decades that Italy's strict laws making firing workers almost impossible discourages them from hiring more employees in moments of need.
Further strategy also includes privatisation of sectors, which Tremonti didn't specify, and what he said would be a "speeding up" of investment to improve and modernise infrastructure, as a way to wake up Italy's slumbering economy.
Italy's Parliament went on holiday for a month earlier this week, but today, responding to the quickly worsening economic nervousness, officials of the two chambers said key committees would keep working throughout August.
And all the lawmakers were expected to be summoned back to work as soon as the reforms pushed by Berlusconi are ready for a full vote.
Later, Berlusconi’s spokesman clarified that convening an “extraordinary meeting” of the G7 finance ministers was still “at the reflection stage” with no decision yet taken, although Italy favoured one.
Berlusconi’s coalition, despite setbacks this year in local elections, has a comfortable majority in parliament assuming his often fickle ally, the Northern League, closes ranks.
The opposition centre-left has been clamouring for Berlusconi to step down, insisting he has essentially done nothing in three years to create jobs or lower the tax burden on workers.
Berlusconi’s pledges tonight “are nothing new compared to the paucity of ideas shown by his government in recent months,” said Rosy Bindi, an opposition leader.