ROME (AFP) ― Italy kicked off a crucial week of economic diplomacy for the future of the euro with a draconian austerity package of cuts, taxes and pension reforms to be presented to parliament on Monday.

The cabinet gave its go ahead to the crisis-busting plan on Sunday estimating that it would save 30 billion euros ($40.3 billion) but warning that it would not prevent the economy from slipping back into recession next year.

“This is a decree to save Italy,” Prime Minister Mario Monti told reporters after the cabinet meeting. Italy will “put its deficit and debt under strong control,” he said.

Monti was set to outline the plan at 1500 GMT in a speech to parliament, where final approval is expected before the start of the Christmas holidays.

As economic observers waited to gauge market reaction to the new measures, Germany’s Chancellor Angela Merkel was set to meet French President Nicolas Sarkozy for talks in Paris over a hotly-anticipated plan to save the euro.

She and Sarkozy have vowed to unveil a scheme to overhaul economic government within the EU through greater fiscal unity and more intervention.

Italy, the eurozone’s third biggest economy, is desperate to prove to its European neighbors that it should be part of the discussions on saving the eurozone ― rather than being seen as one of its biggest problems.

Monti’s three-year package increases taxes on housing and luxury items and includes an option to raise value-added tax if necessary from 2012.

It also includes a controversial pension reform that will increase the minimum pension age for women to 62 from 2012 and see both sexes retire at 66 by 2018 ― as well as increase the number of years men have to pay their dues.

Trade unions have bitterly opposed the pension reforms and Susanna Camusso, head of Italy’s largest union, the CGIL, said the measures were aimed at “making money on the backs of poor people in our country.”

But Monti warned that Italians had to make “sacrifices” and said he was renouncing his own salary as prime minister in a gesture of solidarity.

Economic Development Minister Corrado Passera said on Twitter: “I understand the unease that many citizens feel about the sacrifices they face but a catastrophe is looming and must be avoided even if it costs.”

A former top European Union commissioner who came to power just three weeks ago after the flamboyant Silvio Berlusconi was ousted by a wave of panic on financial markets, Monti said Italy was at a dramatic crossroads.

“We’re faced with an alternative between the current situation, with the required sacrifices, or an insolvent state, and a euro destroyed perhaps by Italy’s infamy,” he said.

Italy’s whopping debt ― which stands at 120 percent of its GDP ― has spooked markets, and Rome was under intense pressure to secure measures to rein in its debt ahead of a crucial European Union summit on Thursday and Friday.

The government said it will meet its target of balancing the budget by 2013.

Italy’s long-term borrowing costs have spiked as high as 8.0 percent but the government has denied insistent rumors that it could accept a credit line from the International Monetary Fund to help it refinance its debt.

France and Germany say a debt blow-up in Italy could kill off the entire euro area and observers warn Italy is “too big to bail” in case of a default.

After Monday’s Franco-German summit, EU leaders will have three days to digest proposals before the EU summit begins in Brussels and the board of the European Central Bank meets in Frankfurt.