Op-ed: Italy watches its steps carefully

Silvio Berlusconi has taken another step back with regard to his austerity plan for public accounts. The change was immediately reflected in the country's risk premium. It shot back up to over 300 basis points. As a result of the difficult political climate and popular resistance to the federal spending cutbacks, the Italian prime minister was forced to lift the solidarity tax on the nation's wealthy who earn more than 90,000 euros. In place of the tax, Berlusconi promised that he will reinforce the fight against tax fraud. We have seen the same kind of promise from Greece, and they have not been able to increase revenues with this strategy.

Italy is struggling to increase their revenues with strategies as vague as this. Moreover, Berlusconi has diluted the impact of spending cutbacks for local governments by simply fusing a few town and city councils. Uncertainty around the efficacy of these plans is painting a picture of what the 2013 budget will look like. The European Central Bank will have something to say about it after they have intervened in the markets in order to alleviate financing costs for Italy.

Moreover, the threat of myriad lawsuits is rising now that citizens are finding out that past contributions to social security will not go toward their pensions. Not to mention the effect that cutbacks will have on future growth, profits and Italy's road to recovery. This is a travel advisory, so to speak. Maintaining credibility is essential. And Italy has faltered enough already.