Mario Draghi, governor of the Bank of Italy, has given a qualified endorsement of the centre-right government’s proposed austerity package while criticising in general what he called the piecemeal approach by European governments and policymakers to the sovereign debt crisis.
Mr Draghi, who is to take over as head of the European Central Bank in November, said the “partial and temporary interventions” to manage the eurozone financial crisis had not gone smoothly and had increased uncertainty in the markets.
“We must now bring certainty to the process by which sovereign debt crises are managed, by clearly defining political objectives, the design of instruments and the amount of resources,” he said.
Turning specifically to Italy, Mr Draghi said the austerity package under consideration in parliament was “an important step” but he urged Silvio Berlusconi’s coalition government to define very quickly further legislation that would be needed to eliminate the budget deficit by 2014.
“This is what markets look at today,” Mr Draghi told Italy’s banking association in Rome after sharp increases in Italy’s cost of borrowing over the past week. Tax increases were unavoidable, he said.
Italy’s opposition parties have said they will co-operate with Mr Berlusconi’s coalition to ensure that the three-year austerity budget passes through parliament in record speed with a final vote in the lower house on Friday.
The legislation is currently in the senate where a committee heard warnings from Ignazio Visco, deputy director-general of the Bank of Italy, on the impact of the widening spread between Italian and German bonds.
A persistent yield gap of 300 basis points would present substantial problems, he said, noting that spreads had narrowed only slightly on Wednesday to 280 points. Each rise of 100 basis points in the cost of borrowing would be equal to 0.2 per cent of GDP in the first year and 0.4 and 0.5 per cent in the second and third years.
“The situation requires rapid and courageous decisions,” he told the senate, urging parliament to pass the legislation as soon as possible.
Both Bank of Italy officials urged the government to pass structural reforms to accelerate Italy’s sluggish economic growth, a theme that was stressed in an IMF report on the Italian economy released on Tuesday night.
“A comprehensive package of reforms is necessary to further raise productivity and enhance growth potential,” the IMF said.
IMF directors also assessed the austerity budget as “an important step” towards the goal of balancing the budget by 2014 and “stressed that decisive implementation of the package is key”. However they also voiced some misgivings, noting that more frontloaded cuts “would have a positive effect on market sentiment” and that proposed tax reforms still had to be defined.
The IMF forecast GDP growth this year of 1.0 per cent, down from 1.3 per cent in 2010. The debt to GDP ratio is projected to reach 120.6 per cent this year, the second highest in the eurozone after Greece.
“Given the high level of public debt and the current market turbulence, fiscal discipline is a prerequisite for growth,” the IMF said. “Only sustained growth will reduce the burden of public debt.”
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