Agreement on pension reform in Italy

Italy's government and unions reached a landmark agreement on pension reforms yesterday after overnight talks, potentially resolving one of the biggest challenges for Prime Minister Romano Prodi's coalition.

Mr Prodi announced the deal just after dawn and his Cabinet approved it unanimously a few hours later. But doubts voiced by his leftist allies heralded a tough passage through Parliament.

"This agreement gives Italians a more just country, with new prospects for young people and a balanced pension system for the long term," said Mr Prodi. "It respects our spending reductions."

Pensions divided his Catholic-to-communist coalition as it tried to water down a reform inherited from Mr Prodi's conservative predecessor Silvio Berlusconi, due to come into force in 2008.

The current system, which allows Italians to retire at 57 if they have worked for 35 years, has been deemed unaffordable for a country with a rapidly aging population and low birth-rate.

The original reforms would have raised the retirement age to 60 from 2008 and then to 62 by 2014, for estimated savings of €9 billion a year from 2010 - money that Italy badly needs to meet EU rules on the budget deficit.

Mr Prodi and unions wanted more gradual increases but disagreed on where to stop, while the prospect of lower savings alarmed the EU, International Monetary Fund and ratings agencies.

Under the deal, the pension age would rise gradually to 61 between 2008 and 2013, a decision seen costing around €10 billion over 10 years. Mr Prodi said this would be balanced by other measures and the four-year economic plan would be respected.

Women would still be allowed to retire earlier than men under the reformed pension system, though the government said the EU might ask for this difference to be scrapped.

"We have written the last chapter on pension reform," said Economy Minister Tommaso Padoa-Schioppa. He added that the deal took into account all Brussels' concerns.