Outbreak of political sanity calms markets

Italy and Greece

The austerity package designed to pull Italy – and the euro – back from the brink was on schedule for approval by lunchtime today after a distinctly un-Italian display of cross-party unity saw it race through the Senate yesterday.

Investors saw the bill's swift passage as evidence the gravity of Italy's situation had finally dawned on parliament; by the afternoon borrowing costs had eased and Milan's stock market had rallied. After a torrid week in the eurozone, there was also, finally, a new government in place in Greece as the former European Central Bank board member Lucas Papademos was sworn in as the country's Prime Minister and a new government was appointed after five days of political wrangling.

The unelected Prime Minister and his new government – which includes the former Finance Minister Evangelos Venizelos – have been tasked with introducing the latest austerity measures imposed by the international community in return for the next tranche of vital bailout cash.

Italy is hoping that its actions this week will stave off the need for assistance. If as expected the Italian lower house rubber-stamps the "stability package" this evening, today should also see the departure of Silvio Berlusconi from the Prime Minister's office.

The package of cuts and reforms is designed to save €60bn and erase Italy's budget deficit by the end of 2013. Measures include boosting flexibility in labour markets, a freeze in public sector pay, raising the retirement age and a new crackdown on tax evasion. Few believe passing the law will be enough, however, if there isn't a determined government quickly in place to enforce it after Mr Berlusconi's departure – hence the urgency with which President Giorgio Napolitano is seeking to install the respected economist Mario Monti as caretaker premier. His mandate will be to build a consensus government of moderate politicians and technocrats as the next phase in the plan to rescue Italy's economy.

Mr Monti was greeted by applause as he entered the Senate yesterday as its newest life member, as part of President Napolitano's plans to beef up the former EU Competition Commissioner's political credentials. But, with a number of MPs calling for fresh elections rather than a Monti-led administration, other politicians and business leaders repeated demands for parliament to put financial stability ahead of politics.

Gianni Alemanno, the conservative Mayor of Rome, came out in favour of a Monti administration. "There has to be a technical government," he said. Emma Marcegaglia, the head of the employers' confederation Confindustria, said opting for elections could prove disastrous. "There are no alternatives [to an emergency government] because a three-month election campaign would ruin the country," Ms Marcegaglia said.

Divisions running through Mr Berlusconi's ruling People of Freedom (PDL) party over a technocrat administration were vividly demonstrated when the moderate Foreign Minster, Franco Frattini, got into a public spat with the fiery Defence Minister and ex-fascist party member Ignazio La Russa, who wants fresh elections. Mr Frattini had dismissed the "fascists of the PDL" who were "trying to ruin everything again".