Italy PM warns policymakers against dividing Europe

Reuters News
Posted: Dec 19, 2011 3:42 AM
Italy PM warns policymakers against dividing Europe

By Gavin Jones and Steve Scherer

ROME (Reuters) - Italy's prime minister urged European policymakers on Friday to beware of dividing the continent with their efforts to fight its debt crisis and warned them against feeding "short-term hunger for rigor" in some countries, in a swipe at Germany.

German Chancellor Angela Merkel -- under pressure from the voter-revered Bundesbank to force debt-saddled euro zone countries to reform and save their way out of crisis -- has led a push for automatic sanctions for deficit sinners in the bloc.

This has fed concerns that excessive debt-tightening in southern euro zone countries could send their economies into a negative spiral with no prospect of growing out of the crisis, and a real chance of feeding resentment of the prosperous north.

Italian Prime Minister Mario Monti said Europe's response to the debt crisis "should be wrapped in a long-term sustainable approach, not just to feed short-term hunger for rigor in some countries."

"To help European construction evolve in a way that unites, not divides, we cannot afford that the crisis in the euro zone brings us ... the risk of conflicts between the virtuous North and an allegedly vicious South," he told a conference in Rome.

The head of Italy's largest labor federation CGIL said on Wednesday the country risks a "social explosion" over the government's austerity measures and unions plan more protests against them.

Monti's government of unelected technocrats was appointed last month -- a move welcomed by the European Central Bank, which has resisted calls to embark on unlimited purchases of sovereign debt to quell the crisis which has engulfed Italy.

European Central Bank President Mario Draghi, also attending Friday's Rome conference, said a day earlier that euro zone governments are on the right track to restore market confidence but reminded them the bank's bond-buy plan was "neither eternal nor infinite."

Draghi also urged banking authorities on Thursday to ensure that tougher capital rules do not lead to a credit crunch.

Yves Mersch, another ECB policymaker, echoed Draghi's concern, saying the whole euro zone faced the risk of recession.

"We are worried about a credit crunch, which could plunge our economies -- including the best ones -- into a recession again," he told German television station ZDF late on Thursday.

In Italy, employers' lobby Confindustria on Thursday slashed its 2012 gross domestic product (GDP) forecast, projecting a contraction of 1.6 percent from growth of 0.2 percent seen previously and said even that estimate was optimistic and based on a gradual easing of the euro zone debt crisis.

Monti's government was appointed to face a collapse in market confidence. He has raced to push through a package of tax hikes, spending cuts and pension reform aimed at meeting Italy's goal of balancing its budget in 2013.

Separately, Ireland's debt-strapped economy contracted by 1.9 percent in the third quarter, far worse than expected, the stakes for its fiscal and debt targets under an EU-IMF bailout.

(Writing by Paul Carrel; Editing by Jeremy Gaunt)