January 16, 2012 1:04 am

Pat on back from Merkel is not enough

From Mr Guy Verhofstadt.

Sir, Quentin Peel reports on Angela Merkel’s praise for the tough reform measures being taken now by the government of Mario Monti in Italy to restore confidence in the markets and lay a more solid basis for sound public finances after the reckless Berlusconi years (“Italy’s economic reforms win glowing approval from Merkel”, January 12).

The Monti measures are already having a positive effect on markets and have succeeded in keeping the rating agencies from the door. But Italy is not out of the woods yet and Mr Monti still faces a number of fierce domestic battles, not least with public sector unions and hitherto protected professions. He needs all the help he can get, not just a pat on the back from the German chancellor, comforting as that may be.

In particular, Mr Monti himself has called for a reduction in the high interest rates demanded by investors on Italian government bonds, which are crippling prospects for economic growth. Italy is still currently paying more than treble the rate of Germany in interest payments on its 10-year bonds. With lower interest rates, billions would be saved and this money could more usefully be spent on stimulating growth and jobs in the economy, which in turn would benefit German exports. If Ms Merkel would only heed the recommendations of her own economic advisers and accept a form of debt redemption fund to bring down excessive debts in the eurozone (above 60 per cent of gross domestic product), it would not only go a long way to ending the current sovereign debt crisis (without creating the moral hazard she so fears) but stimulate the growth and investment on which the German economy also thrives.

Rather than just applauding Mr Monti and offering more cash for the European Stability Mechanism, the German chancellor should rather agree to the establishment of a redemption fund as soon as possible. This is the only way to ensure that all the efforts undertaken by the Italian government will not be eaten up by high interest payments.

Guy Verhofstadt, Leader of the Alliance of Liberals and Democrats for Europe, European Parliament, Former Prime Minister of Belgium

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