Germany warns Italy not to deviate
GERMANY told Italians yesterday they had to accept Prime Minister Mario Monti’s tough economic measures to avoid becoming the next victim of the euro-zone debt crisis after a bail-out for Spain’s banks failed to calm markets.
“If Italy continues along Monti’s path there will be no risks,” German Finance Minister Wolfgang Schaeuble told La Stampa daily when asked whether Rome was next in the markets’ firing line.
Highlighting that peril, the euro zone’s third-biggest economy had to pay nearly 4% to sell one-year treasury bills at auction yesterday, a sixmonth high, due to fears about its ability to keep servicing its debt.
Italy’s €1,9-trillion public debt is equivalent to 120% of gross domestic product, a ratio second only to Greece’s. A month ago, Rome had paid just 2,34% on one-year paper.
Mr Schaeuble said Italy had made huge progress under Mr Monti’s government of technocrats, which has taken austerity measures and launched pension and labour market reforms since replacing Silvio Berlusconi’s scandal-plagued administration in November.
“This is acknowledged everywhere in Europe and the markets,” Mr Schaeuble said. “I can only hope political forces in the Italian parliament and public opinion continue to decisively back him, because the road towards a return to sustainable growth through structural reforms, improved competitiveness and a lower deficit is the right one.”
Mr Monti, whose popularity has slumped after an initial honeymoon, met the leaders of the parties backing him in parliament on Tuesday. In a statement, he said he was “worried by the situation of emergency” on financial markets, and had told them “cohesion” was needed “to overcome the critical situation and give an image of unity abroad”.
Markets calmed slightly yesterday due to expectations of further euro-zone policy action to tackle the debt crisis, but investors remain wary ahead of a general election in Greece on Sunday that could lead to the country leaving the euro zone.
European Union (EU) officials have hinted that they would be willing to consider giving Greece more time to achieve its fiscal targets, easing the pace of austerity, provided a new government accepted the main conditions of its international assistance programme.
The possibility of a victory for radical leftists who have vowed to tear up Athens’ EU-International Monetary Fund bail-out memorandum has driven neighbouring Cyprus to the brink due to its banks’ heavy exposure to Greece.
The country’s central bank governor said yesterday Cyprus was seeking the best terms for any bailout it might apply for and had other options than an EU-led rescue, an apparent reference to seeking help from Russia and China. He declined to comment on the timing.
“If we eventually apply, because it is not a given that we will apply (and) there are also other options, we will seek the best terms for the economy,” Panicos Dimitriades said.
EU leaders plan to call for much stronger banking and fiscal integration and enhanced governance in the euro zone at a summit later this month, but draft conclusions left the details vague.
“Recent developments have demonstrated the need to take the Economic and Monetary Union to a further stage,” said the draft to be discussed by EU envoys today.
“The new stage will build on deeper policy integration and coordination. There is a need for more specific building blocks centred around a much stronger banking and fiscal integration, underpinned by enhanced euro governance.”
The document said leaders of the 17-member currency area would hold a separate meeting right after the 27-nation EU summit to discuss a timetable for those reforms.
Spanish Prime Minister Mariano Rajoy, speaking in Madrid, said while each country had to take its own measures to clean up public finances and reform the economy, only closer integration could solve the crisis.
“This situation can only be fixed by doing what must be done at home and with much more Europe and much more integration. The most urgent thing is that there should be more clarity on the euro zone.”
Addressing parliament in Rome yesterday, Mr Monti said the EU needed a growth plan including greater investment and eventually joint euro bonds to stem the spread of the crisis.
Spanish 10-year bond yields fell slightly after hitting a euro lifetime record of 6,86% on Tuesday, as investors weighed the risk that the Spanish state may eventually need a full bail-out if the bank rescue fails.
Mr Schaeuble sought to quash such talk, telling La Stampa: “Spain too is on the right path. It does not need an aid programme. It has a specific problem with its banking sector and I’m sure it will solve it.”
German bond prices tumbled yesterday, extending a steep fall the day before, although traders expect them to rebound with markets still fixated on Spain’s elevated yields and the Greek election. Reuters