The Italian Senate is rushing through austerity measures demanded by the EU to avert a eurozone meltdown, after US President Barack Obama ratcheted up pressure for more dramatic action from the currency bloc.
The Senate approved a new budget law yesterday, clearing the way for approval of the package in the lower house today and the formation of an emergency government to replace that of Italian Prime Minister Silvio Berlusconi.
Obama spoke with German Chancellor Angela Merkel and French President Nicolas Sarkozy late on Thursday and also called Italian President Giorgio Napolitano, who in turn was due to speak to Sarkozy in a round of telephone diplomacy.
A German government official said there had been an “exchange of opinions” between Merkel and Obama, while US Treasury Secretary Timothy Geithner demanded fast action from Europe.
If the votes pass smoothly, Napolitano will accept Berlusconi’s resignation this weekend and ask former European commissioner Mario Monti to form a government.
Berlusconi, who lost his majority in a vote on Tuesday, has promised to resign after the financial stability law is passed by both houses of parliament.
He had insisted on early elections, but then softened his stance. Markets were calmed by the prospect that there would be an interim government, rather than a three-month vacuum before elections are held.
“The most important element to overcome this crisis is a very trusted and able new Italian government that can really fulfill the structural changes that are needed,” European Central Bank (ECB) policymaker Ewald Nowotny said in Beijing.
The euro stabilized, but investors doubted whether it would climb far, given that even a technocrat Italian government might struggle to make progress on long-promised fiscal reforms.
Italian 10-year borrowing costs fell sharply to 6.7 percent, having hit an unsustainable 7.5 percent earlier in the week.
“We can have maybe two or three days of calm — in inverted commas — but nothing has really changed underneath,” one bond trader said.
With European leaders dithering over how to tackle the deepening crisis, pressure has mounted on the ECB to act more forcefully by becoming a full lender of last resort, as the US Federal Reserve and Bank of England are.
Three senior ECB policymakers on Thursday rebuffed arm-twisting from investors and world leaders to intervene massively on bond markets to shield Italy and Spain from financial contagion.
German Minister of Economics and Technology Philipp Roesler yesterday said the ECB did not have “unlimited firepower,” adding that if it opened its floodgates fully, they could never be closed again.
Germany strongly opposes the ECB taking on a broader crisis-fighting role as a threat to the bank’s independence.
Klaus Regling, the head of the 440 billion euro (US$613 billion) European Financial Stability Facility, was reported by the Financial Times as saying the recent market turmoil had made it more difficult to scale it up to 1 trillion euros, as proposed by eurozone leaders who promise a definitive plan by next month.
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