Italy’s prime minister Mario Monti complained on Wednesday that other European nations do not seem to appreciate the difficult austerity measures that his government is enacting. “Despite these sacrifices, we do not see concessions from the EU, such as in the form of lowered interest rates,” he told a German newspaper.
Monti was in Berlin to confere with Chancellor Angela Merkel who leads the strongest economy in Europe’s single currency area.
Italy, with a public debt that equals 120 percent of its annual economic output, is deemed too big to bail out. It is feared that if it fails to regain confidence from international money markets, the nation could imperil the survival of the eurozone.
The European Central Bank in Frankfurt has financed Italian deficit spending since the end of last year with a bond purchase program that is capped at €20 billion per week. This effort has alleviated Italy’s immediate fiscal predicament but cannot be sustained in the long term. The country has to balance its books if investors are to lend to it again at an affordable rate.
Italy’s borrowing costs dropped sharply in December from 6 percent the month before to just over 3 percent. They have risen again since the start of this year to over 7 percent.
In Berlin on Wednesday, Monti argued that the higher interest rates were unjustified, “especially after representatives of those same markets have said they appreciated the efforts made.” He was referring to American credit rating agencies which have praised Monti’s deficit reduction measures but expressed concern about Italy’s ability to stave off a pan-European debt crisis at the same time.
Chancellor Merkel concurred with her Italian counterpart. “Both in terms of the speed and the susbtance of these measures,” she said, “they will strengthen Italy; will improve its economic perspective.”
Monti replaced Silvio Berlusconi as Italian prime minister in November of last year to head a technocratic government with broad parliamentarian support and a mandate to implement billions worth of austerity measures. Public spending is supposed to be reduced by some €20 billion, the retirement age will be raised as will property taxes and the value-added tax to boost revenue by roughly €10 billion. There is also an effort underway to crack down on tax evasion which is pervasive in Italy.
The priority now turns to growth which is stifled by high levels of central and local government spending, industrial monopolies and a culture of corruption that is anathema to the more productive economies in the north.
In an effort to improve competitiveness across the eurozone, German chancellor Merkel has pushed for a pact that will address the disparities in economic and fiscal policy that exist beween the core and peripheral states in the currency union. Monti appeared to welcome the initiative. “Germany for a long time has offered to every European country concrete proof of how public budget discipline and an economy founded on market principles are the best recipe for growth,” he said.
At the same time, he recommended a more activist policy on the part of the European Central Bank which the Germans are wary of. They’re afraid that if the central bank continues to buy peripheral sovereign debt, it will undermine the incentive on the part of highly indebted countries to reform. Monti is under pressure at home though from Berlusconi’s former ruling party which is the only one that does not support his government. “I cannot be successful with my policies if the policies of the EU do not change,” he warned. “If that doesn’t happen, Italy — which has always been a pro-European country — could flee into the hands of populists.”