European Central Bank (ECB) officials warned that uncertainty and tension over Italy’s expansive budget risk causing damage to the nation’s economy in the long-run.
“Italy’s current financing conditions are much too tight for a country with weak growth and low inflation,” ECB chief economist Peter Praet told Handelsblatt in an interview published on Thursday.
Italian Central Bank Governor Ignazio Visco urged his government to lower debt financing costs by reducing uncertainty.
While the nation’s bonds have risen in the past two days, 10-year yields are still near 3.5 percent, far higher than at the start of the year.
In addition to investor pressure, the European Commission has rejected the budget of the populist government. Earlier this week, Italian Minister of Economy and Finances Giovanni Tria said that the needless drama is hurting the economy.
Speaking in Munich, Germany, on Thursday, ECB executive board member Yves Mersch said it was “imperative” for highly-indebted eurozone members to balance their books and reduce debt.
He also warned — without specifically naming Italy — that the lack of fiscal discipline in one eurozone nation could spill over to the rest of the region.
Praet said that he does not see any real contagion effects so far. He signaled that the ECB would not intervene so long as the problem affects only Italy, as it conducts monetary policy for the eurozone as a whole.
If contagion did occur, “we would have to analyze the situation,” Praet said.
Outright Monetary Transactions — a tool devised by the ECB at the height of the debt crisis and which has never been used — would be the “appropriate instrument,” he added.
Asked about other ECB policy tools, such as speculation around a new round of cheap funding for banks, Praet responded that it’s “premature” to decide now.
Next month, the ECB is to discuss guidelines for reinvesting maturing debt under its asset-purchase program.
Italian Deputy Prime Minister Luigi di Maio said “we will not cut the key points of the budget plan,” in an interview published yesterday in La Repubblica.
He said he favors sitting down with the European Commission to discuss the government’s spending program.
Italian Minister of European Affairs Paolo Savona is considering resigning over the government’s decision to challenge EU’s budget rules, Corriere Della Sera reported.
The newspaper cited an unnamed League minister as its source.
Additional reporting by Reuters
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