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Italian Prime Minister Mario Monti should stay in power after next year’s elections to support the country saddled with the euro area’s second-largest debt, said Nobel Prize-winning economist Robert Mundell.
“Although he is not a magician, he is probably going to be the best next thing for Italy politically,” Mundell said in an interview in Rome today. “Continuation of Monti is probably better than any of the political alternatives at the moment.”
Italian bond yields dropped on June 29 after European leaders meeting in Brussels agreed to loosen bailout rules, move toward a banking union and break the link between sovereign and banking debt through the direct recapitalization of lenders. While the International Monetary Fund recommended last month that euro-area nations issue common debt, calling the crisis at a “critical stage,” German Chancellor Angela Merkel remains opposed to debt sharing.
The premium investors demand to hold Italian 10-year debt over comparable German government bonds rose 15 basis points to 424.4 basis points as of 2:30 p.m. in Rome.
Italy’s recession-hit economy will shrink 2.4 percent this year, twice the pace predicted by the government, as rising unemployment causes a slump in consumer spending, employers’ lobby Confindustria forecast on June 28. Italy’s debt will rise to 125.7 percent of gross domestic product in 2012 before peaking at 125.8 percent next year, the group said.
Italy’s main political parties, which suspended their rivalries to support Monti after he was appointed in November, have seen their backing plummet to the lowest in about two decades, opinion polls showed last month.
Monti “is the one that so far commands prestige and respect and, although I think there hasn’t been any great solution yet, he is new in the job and would be much better in the next round,” Mundell said. “Also, he has got close connections to Merkel and I think that is money in the bank.”
Monti and Merkel are meeting in Rome later today. Mundell, 79, won the Nobel Prize in 1999 for research that helped to lay the foundation for Europe’s single currency.
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