(Updates with bond yields, euro in ninth paragraph, Merkel on austerity in 13th. For more debt-crisis news, see EXT4.)
Jan. 11 (Bloomberg) -- German Chancellor Angela Merkel praised the Italian government’s deficit-reduction steps as Prime Minister Mario Monti said investors shouldn’t see Italy as a source of contagion in the debt crisis.
Italians have supported “very tough” austerity measures brought in by his government and Italy deserves recognition for that, Monti told reporters in Berlin today after talks with Merkel. Italy “should be seen as doing its part alongside Germany, France and other countries in steering Europe toward stability.”
Monti’s visit yielded a renewed vote of confidence by Merkel and a plea for a breather from investors who before he took office in November drove Italian 10-year bond yields to levels that preceded bailouts for Greece, Ireland and Portugal.
Germany has “great respect” for how quickly Monti has pushed through austerity measures, Merkel said. “The speed and the substance of these measures are something that will strengthen Italy and improve its economic circumstances.”
The leaders of Europe’s No. 1 and No. 3 economies met as policy makers strive to tamp down the crisis that began in Greece in late 2009 and infected Italy, Spain and France last year. Merkel and French President Nicolas Sarkozy are due in Rome on Jan. 20 to set the stage for a European summit in Brussels 10 days later that’s meant to focus on boosting jobs and growth in the euro region as recession looms.
Italian Debt Sales
Monti, who spent his first month in office enacting 30 billion euros ($39 billion) in austerity and growth measures, faces almost half a trillion euros of debt sales this year. Italian bond yields don’t adequately reflect his debt-cutting efforts, he said.
“What Italians are hoping and what I hope for is that, before the months it takes for good economic policy to translate into higher growth, there will be a decline in high interest rates in financial markets that may have been more or less justified when there was a lot of concern about Italy, but that aren’t justified anymore,” Monti said.
He suggested that Italy can’t achieve that goal alone. Each European country must reach “a healthy economic structure” that will boost growth, he said. “The European context must become more favorable, thus permitting in time a reduction in interest rates.”
The yield on Italy’s 10-year bond fell 14 basis points to 6.98 percent today. Spanish two-year yields fell to the lowest in nine months as lawmakers approved Prime Minister Mariano Rajoy’s first austerity measures. The euro fell 0.6 percent to $1.2712 at 3:45 p.m. in Frankfurt.
Monti warned in comments published before he met Merkel that his austerity measures might trigger anti-European protests in Italy without signs of economic progress.
“I am demanding heavy sacrifices from Italians,” the German newspaper Die Welt quoted him as saying in an interview published today. “I can only do this if concrete advantages become visible.” Otherwise, “a protest against Europe will develop in Italy, including against Germany, which is seen as the ringleader of EU intolerance, and against the European Central Bank.”
While Monti said German “discipline” is the best way to overcome the debt crisis, Merkel rebuffed the notion that she is seeking to impose German order across the euro area.
“We are not doing all of this just so one of us can torture the other a little bit,” she said. “In politics, there’s never a final reform. The world is changing pretty quickly and we constantly have to adapt to those changes.”
--With assistance from Andrew Davis in Rome. Editors: Alan Crawford, Jeffrey Donovan.
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