Italy Reaches Deal With Unions, Averts Strike

ROME -- The Italian government and labor unions agreed to renew public employees' contracts, with wage increases retroactive to February, averting a general strike scheduled for Friday, union officials said.

The accord came after it became clear Prime Minister Romano Prodi's center-left government had lost ground in local elections that ended Monday, making it harder for the premier to fend off left-wing members of his fractious coalition who want the government to allocate more resources to the public sector and the pension system.

The meeting between the government and the unions started late Monday and ended in the early hours of yesterday, when election results showed that Mr. Prodi's nine-party alliance had lost mayorships in some key cities, especially in the richer north of the country.

The government agreed to pay the 3.5 million public-sector workers an extra monthly average of €101 ($135.90). The government initially offered to start the pay increase in December 2007. The wage rise represents an increase just shy of 5% over a two-year period, compared with a 2006 inflation rate of 2.1%.

The wage increase will cost Italy about €600 million ($807.3 million) more than it had initially set aside. The government had reserved about €3.7 billion for the wage settlement. Mr. Prodi and the moderates in his coalition, including Economy Minister Tommaso Padoa-Schioppa, wanted to keep a lid on public-sector wages, which have risen twice as fast as private-sector pay in recent years despite lower productivity gains. But the prime minister faced stiff opposition from unions and the left-wing parties in his own coalition.

If the breakdown of the election results shows the left-wing parties won votes at the expense of the moderates in the ruling coalition, Mr. Prodi may find it harder to continue to give strong backing to his economy minister.