Greece and Italy Under Pressure on Austerity; Germany Awaits Key Court Ruling

The euro zone's most indebted nations were scrambling Wednesday to convince investors and the rest of Europe of their commitment to tackle their debt problems, even as the bloc's main paymaster Germany battles increasing opposition to further aid.

Germany's top court is due to deliver a ruling around 0800 GMT (4 a.m. ET) that may grant legislators more say over future aid, but was expected to stop short of blocking Berlin's contribution to a current series of multi-billion-euro bailouts.

Italy's center-right government promised on Tuesday to hike value-added tax as it bowed to market pressure for more action on its swollen debt and ignored mass street protests and strikes against its austerity measures.

Greece's finance minister pledged to speed up delayed privatizations and structural reforms, while his Irish counterpart said Dublin was considering making a deeper fiscal adjustment than planned next year to boost market confidence.

We are in the middle of a peculiar war -- if we lose, we lose everything, Greek Finance Minister Evangelos Venizelos told reporters. If we don't complete structural reforms, if we don't change the way the state and the economy work, we will be stuck.

Doubts about the will of Italy and Greece to push through the austerity demanded by their partners have darkened the political mood in Europe as leaders grapple with a two-year-old debt crisis that has triggered renewed pressure in bond markets.

With Italian bond spreads over German bunds widening, Prime Minister Silvio Berlusconi met ministers as the Senate began a debate opening the way for approval of a 45.5 billion euro austerity package on Wednesday.

Rome said it would raise value added tax and introduce a constitutional balanced budget amendment as part of a revised plan. But its credibility has taken a hammering in financial markets because of the chaotic way it has been handled.

With investors alarmed at Italy's lack of progress in reining its 1.9 trillion euro debt, Rome's borrowing costs have been rising inexorably for more than a week, despite intervention by the European Central Bank.

Italy is governed appallingly badly, European Energy Commissioner Guenter Oettinger told a conference in Berlin on Tuesday, accusing Berlusconi's government of irresponsibility and saying the ECB, which has bought Italian bonds in the open market to hold down yields, had been cheated.

FISCAL BACKSLIDING

Meanwhile, fiscal backsliding in Athens has put a new aid payment from the country's international lenders in danger and prompted lawmakers in German Chancellor Angela Merkel's party to call for Greece's ejection from the 17-nation currency area.

Just six weeks after euro zone leaders came together in Brussels to agree on new anti-crisis measures -- including a second bailout for Greece and new powers for the bloc's rescue fund -- their strategy looks to be unraveling.

In southern Europe, public resistance to new austerity measures is on the rise, while in the north public anger at a series of taxpayer-funded bailouts is building to a crescendo.

Greece has floated the idea of speeding up payments under a second international bailout although it has made no formal request and any such change would be unlikely, an official close to EU and IMF negotiators told Reuters on Tuesday.

Any such demand to cover a higher-than-expected deficit would further complicate talks between Greece and its international lenders, already fraught due to the country's repeated fiscal slippages and reform delays.

Seeking to placate creditors, Venizelos told reporters in Athens late on Tuesday Greece would speed up delayed reforms, key to obtaining an 8 billion euro tranche of aid from a first, 110 billion euro EU/IMF bailout secured in May 2010.

BAILOUT FUND

The ECB is counting on European governments to step in and assume the role of bond-buyer of last resort once their rescue mechanism, the European Financial Stability Facility, receives new powers.

But for that to happen, national parliaments need to approve the changes to the mechanism -- a major hurdle in member states where aid to euro zone stragglers is increasingly unpopular.

A euro zone official said on Tuesday that a deal giving new powers to the bailout fund would be ratified by all euro zone countries by the end of September -- a timeframe that had been put in doubt when a government coalition member in Slovakia said its parliament would not vote until December at the earliest.

Wednesday's ruling from Germany's Constitutional Court in Karlsruhe, in a case brought by six prominent euro-skeptics who argue the euro zone's existing bailouts are unconstitutional, could limit Berlin's ability to react swiftly if the debt crisis deteriorates further.

A reversal of German contributions to previous aid packages is not to be expected, said Nicolaus Heinen, an economist at Deutsche Bank.

It is much more likely that the (the court will set) additional conditions on the future involvement of the legislative branch in deciding on aid programmes.

Merkel will react to the ruling in a speech to the Bundestag later in the day, and her own position may be at risk if enough of her conservative allies vote against a stronger EFSF in a parliamentary vote scheduled for Sept. 29.

At a meeting with her party on Monday, Merkel was pressed repeatedly on whether it would not be preferable to push Greece out of the euro zone. She warned against it, saying such a step might set off a dangerous domino-effect.

German Economy Minister Philipp Roesler told the Hannoversche Allgemeine Zeitung newspaper that Greece cannot by excluded from the currency bloc because EU treaties do not allow it.

The wheel of history cannot be turned back, he said. The exclusion of a country is also legally not possible because of the treaties in effect.

IRISH AUSTERITY

Ireland, the third country, along with Greece and Portugal, to have been bailed out so far, has promised its EU and IMF creditors it will cut its deficit, the worst in the euro zone, from an estimated 10 percent of GDP this year to 8.6 percent next year, but a weakening outlook is making this harder.

The international situation is now running against us and we will probably have to mark down growth rates for 2012 which makes the budget more difficult, Finance Minister Michael Noonan told state broadcaster RTE.

Last June I said that we might have to go somewhere between 3.6 and 4 billion (euros) to arrive at the 8.6 (percent of GDP) figure and that is still the position.

Whether we would go further as a matter of policy to inspire greater confidence both domestically and in the international community is a matter of judgment.

(Writing by Noah Barkin and Alex Richardson; Additional reporting by Stephen Brown, Sarah Marsh and Annika Breidthardt in Berlin, Ed Taylor and Jonathan Gould in Frankfurt, Alberto Sisto and James Mackenzie in Rome and Padraic Halpin in Galway; Editing by Ramya Venugopal)