Prime Minister Mario Monti’s “ambitious” efforts to spur Italy’s economy won’t be enough to shield the country from fallout of the region’s debt crisis without Europe making progress in building a fiscal union, the International Monetary Fund said.
The bearer of the euro’s second-biggest debt “has embarked on an ambitious agenda to secure sustainability and promote growth,” the Washington-based lender said today in a report on Italy. “Despite these strong efforts, Italy remains vulnerable to contagion from the euro area crisis, with spillover consequences for the region and globally.”
While Italy is on track to bring its budget deficit within the European Union limit this year, its 10-year yield bond yield has risen above 6 percent in recent weeks after Spain sought a bailout, fueling concern that Italy might be next. Italy had enjoyed a respite from the crisis after Monti’s government took office in November and passed 20 billion euros ($24.6 billion) in austerity measures and overhauled the country’s pension system.
European leaders are now seeking to create a closer fiscal union to try to improve finances and restore investor confidence.
“Progress at the European level in creating a more integrated currency union with greater fiscal and financial discipline and risk sharing, combined with further monetary easing and unconventional measures as needed by the ECB, is crucial for securing stability and providing needed time for Italy’s adjustment and reform efforts,” the lender said.
Monti, who doubles as finance minister, pressed his case at a meeting with European counterparts in Brussels today for steps to reduce Italy’s bond yields, whether through tapping the euro- region bailout fund or with the support of the European Central Bank.
The IMF praised the efforts by Monti’s government to reduce the budget deficit and increase Italy’s growth potential. Italy’s “priority should continue to be on wide-ranging structural reforms to boost productivity and labor participation, a supportive fiscal strategy that is both growth- friendly and sustainable, and steps to promote a more dynamic and resilient banking system,” the IMF said.
Italy will post a structural budget surplus, net of the economic cycle’s effects and one-time measures, of 0.5 percent of GDP in 2013, the IMF said. Still, with debt set to rise to 125.8 percent of GDP this year before peaking at 126.4 next year, Italy is struggling to shake off the risk of contagion.
Italy, whose growth has trailed the euro region average for more than a decade, “is expected to continue contracting through the year owing to tight financial conditions, the global slowdown, and the needed fiscal consolidation,” the IMF said, confirming its previous forecast of a 1.9 percent contraction this year and 0.3 percent in 2013.
That projections compare with a 1.2 percent forecast by the government, a 2 percent contraction estimated by the Bank of Italy and a 2.4 percent drop in growth expected by the country’s employers lobby Confindustria.
“The recovery will take hold in early 2013, led by a modest pickup in exports,” the IMF said. “The risks to the outlook are however on the downside, stemming mainly from an intensification of the euro area crisis.”
The IMF forecast that exports of Italian goods and services will rise 0.6 percent this year and 1.9 percent next. Still, as joblessness keeps increasing from the current 12-year high to more than 11 percent in 2013, domestic demand will shrink by 3 percent this year and 0.7 percent next year, the report said.
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