Bloomberg News

Trichet Says Italy Must Confirm Commitment to Austerity Measures

September 02, 2011

Sept. 2 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said Italy must confirm its commitment to the “overall goal” it announced on Aug. 5 to reduce its budget deficit.

“These measures decided by the government in its announcement on 5 August are of extreme importance to rapidly reduce public finance deficits and enhance the flexibility of the Italian economy,” Trichet said in an interview with Il Sole 24 Ore, according to a text published by the Frankfurt-based ECB. “It is therefore of the essence that the overall goal in terms of the public finance improvement that was announced be fully confirmed and substantiated.”

Italian Prime Minister Silvio Berlusconi on Aug. 29 agreed to overhaul the 45 billion-euro ($66 billion) austerity plan of Aug. 5, which had helped persuade the ECB to start buying Italy’s bonds. While the full impact of the changes remain unclear, Berlusconi dropped a tax on the highest earners and limited funding cuts to regional governments to appease the Northern League, a key coalition ally opposed to parts the original plan that aimed to balance the budget in 2013.

Finance Minister Giulio Tremonti said yesterday that a planned crackdown on tax evasion will offset lost revenue from a levy on higher earners dropped from the package. The ECB is watching with “great concern” how Italy progresses with budget cuts, Governing Council member Ewald Nowotny told reporters last night.

‘No Negotiation’

Austerity measures are “decisive to consolidate and reinforce the quality and the credibility of the Italian strategy and of the Italian signature,” Trichet said.

Investor fears about the country’s debt load last month pushed its bond yields to euro-era records. Since the ECB began buying Italian securities, the yield on 10-year bonds has dropped more than 100 basis points to 5.15 percent.

Trichet was asked if the ECB’s decision to enter the Italian bond market on Aug. 8 was a quid pro quo for the Aug. 5 pledge of additional austerity measures.

“No. There was no negotiation,” he said. “We sent our message based upon our analysis of the reasons for the market disruption. We analyzed the decision taken by the government. Our decision to activate our Securities Markets Program is designed to help restore a better transmission of our monetary policy.”

Asked if he has any tips for Bank of Italy Governor Mario Draghi, who will take over as ECB president on Nov. 1, Trichet said: “What matters is the permanence of the institution. I am certain that Mario Draghi will ensure the institution’s continuity and credibility over the long term. ”

--Editors: Matthew Brockett, Andrew Davis

To contact the reporter on this story: Matthew Brockett in Frankfurt at mbrockett1@bloomberg.net;

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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