What’s inside Italy’s reform bill?

Italy’s Senate has approved economic reforms demanded by the European Union, paving the way for Premier Silvio Berlusconi to resign as early as this weekend and a new government to be formed.

The Senate voted 156-12 Friday to pass the budget bill, which contained the reform measures. The lower Chamber of Deputies is expected to approve the legislation by Saturday.

Berlusconi has promised to resign as soon as parliament passes the reforms.

There are mounting indications that respected economist Mario Monti will be tapped to head a transitional government to push through even more difficult reforms to pull Italy back from a Greek-style economic crisis that would threaten the existence of the entire eurozone and cause a global recession.

The bill includes an increase in the country’s Valued Added Tax (VAT), from 20% to 21% and a special tax on the energy sector. On the expenditures side, public sector salaries will be frozen until 2014.

The bill also includes longer-term structural fixes. The retirement age for women in the private sector will gradually rise from 60 in 2014 to 65 by 2026. It will then match the retirement age for men.

The bill would also strengthen measures aimed at the black market, limiting cash transactions to 2,500 euros.

While the markets are welcoming the bill as a good start, its passage will hardly set balance sheet right, according to a commentary from Barclays Capital.

“While these are very important developments in terms of approval and implementation of crucial structural reforms, and they may bring back some calm to the markets in the near term, they are unlikely on their own to be sufficient to solve the crisis. Continued volatility is to be expected.”