Rome/Paris: Italy’s new government has announced far-reaching reforms in response to a European debt crisis that on Thursday pushed borrowing costs for France and Spain sharply higher, and brought tens of thousands of Greeks onto the streets of Athens.
Italy’s new technocrat prime minister, Mario Monti, unveiled sweeping reforms to dig the country out of crisis and said Italians were confronting a “serious emergency”.
Italian Prime Minister Mario Monti. (AP photo)
Monti, who enjoys 75% support according to opinion polls, comfortably won a vote of confidence in his new government in the Senate on Thursday, by 281 votes to 25.
He faces another confidence vote in the Chamber of Deputies, the lower house, on Friday, which he also expected to win comfortably.
“Only if we can avoid being seen as the weak link of Europe can we contribute to European reforms,” said Monti, who was sworn in on Wednesday as head of a government of experts after a rushed transition from the discredited Silvio Berlusconi.
In Athens, at least 50,000 Greeks joined a protest rally presenting the first public test for a new national unity government, also headed by an unelected figure, that must impose spending cuts and tax rises if Greece is to escape bankruptcy.
Police fired teargas at black-clad youths as protest marchers beat drums, waved red flags and shouted: “EU, IMF out!”
The Spanish government was forced to pay the highest borrowing costs since 1997 at a sale of 10-year bonds, with yields a steep 1.5 points above the average paid at similar tenders this year.
The euro fell in response. France fared a little better, but again had to pay markedly more to shift nearly €7 billion of government paper. Fears that the euro zone’s second largest economy is getting sucked into the debt maelstrom have taken the two-year-old crisis to a new level this week.
Asian shares fell for a fourth day in a row and the dollar firmed on Friday as Europe’s funding difficulties intensified.
In a sign global funding strains may spread to Asia, benchmark three-month euroyen interest rates futures fell to an eight-month low on concerns that tightness in dollar money markets may prompt non-Japanese banks to raise yen at a higher rate.
“The euro zone has got to deliver something which is going to calm markets down, and at the moment markets feel like they are being given no comfort whatsoever,” Marc Ostwald, strategist at Monument Securities, said.
In Rome, Monti outlined a raft of policies including pension and labour market reform, a crackdown on tax evasion and changes to the tax system in his maiden speech to parliament.
He later spoke to French President Nicolas Sarkozy and German Chancellor Angela Merkel, who all agreed on the need to accelerate reforms, the three leaders said in a joint statement.
With Italy’s borrowing costs now at unsustainable levels, Monti will have to work fast to calm financial markets, given that Italy needs to refinance some €200 billion ($273 billion) of bonds by the end of April.
Ireland, which has been bailed out and gained plaudits for its austerity drive, will also have to do more. Dublin will increase its top rate of sales tax by 2 percentage points in next month’s budget, documents obtained by Reuters showed.
ECB in spotlight
But no amount of austerity in Greece, Italy, Spain, Ireland and France is likely to convince the markets without some dramatic action in the shorter term, probably involving the European Central Bank.
Many analysts believe the only way to stem the contagion for now is for the ECB to buy up large quantities of bonds, effectively the sort of ‘quantitative easing´ undertaken by the US and British central banks.
France and Germany have argued over whether the ECB should intervene more forcefully to halt the euro zone’s debt crisis after modest bond purchases failed to calm markets.
Merkel and British Prime Minister David Cameron will try to resolve clashing views on the euro zone crisis on Friday, after Berlin accused London of being selfish about Europe in comments that touched off British sensitivities about German bossiness.
The outlines of a potential deal became clearer ahead of the Berlin meeting as the Financial Times reported that Cameron would be prepared to back Merkel’s plans to strengthen economic union in the eurozone, on condition he wins safeguards to protect the City of London from European legislation.
Cameron will restate his opposition to a Franco-German proposal for a so-called Tobin tax on financial transactions, which Britain believes would have a withering effect on its financial district, the FT said in an unsourced report.
A British government spokesman said he was unable to comment on the report.
Facing rising borrowing costs as its ‘AAA’ credit rating comes under threat, France has urged stronger ECB action. Berlin continues to resist, saying EU rules prohibit such action.
“If politicians think the ECB can solve the euro crisis, then they are mistaken,” Merkel said. Even if the ECB assumed a role as lender of last resort, it would not solve the crisis, she said.
Euro zone officials hope that if Merkel and others find themselves staring into the abyss, the unthinkable will rapidly become thinkable.
“The Germans have made some remarkable changes to their position over the past few months, you have to give them credit for that, it just takes rather a long time. It’s Chinese torture,” one euro zone central banker told Reuters. “They are not drawing lines in the sand as clearly as they were.”
Banks under the cosh
With turmoil reaching a crescendo, euro zone banks are finding it harder to obtain funding. While the stresses are not yet at the levels during the 2008 financial crisis, they have continued to mount despite ECB moves to provide unlimited liquidity to banks.
Fitch Ratings warned it might lower its “stable” rating outlook for US banks because of contagion from problems in troubled European markets.
Fellow ratings agency Moody’s cut the ratings of 12 German public-sector banks, believing they were likely to receive less federal government support if needed.