Italy warns of euro disaster as debt costs rise

Associated Press + More

By FRANCES D'EMILIO and TOBY STERLING, Associated Press

BRUSSELS (AP) — The European Union faces potential disaster if its leaders don't cooperate and find a way to keep interest rates on Italy's national debt down, Italian Premier Mario Monti warned Wednesday.

Monti's remarks included a thinly-veiled jab at German Chancellor Angela Merkel on a day that Italy's borrowing costs hit year-highs in reaction to Merkel reportedly saying she wouldn't let European governments share debt obligations — which would bring relief to Italy — "as long as I live."

The Italian premier was in Brussels for a meeting of European leaders focused on the continent's raging debt crisis. He said Italians have made great sacrifices and gotten their country's deficit under control. But yields on Italian government bonds keep rising anyway.

If Italians become discouraged that their efforts aren't helping, it could unleash "political forces which say 'let European integration, let the euro, let this or that large country go to hell', which would be a disaster for the whole of the European Union," Monti said.

Germany is Europe's biggest and strongest economy, but Monti noted that Germany itself violated the eurozone's 3 percent deficit limit in 2003, along with France.

Monti's mention of "political forces" is a reference to his predecessor Silvio Berlusconi, who has recently begun saying he doesn't understand why Italy doesn't just ditch the euro.

Although most economists agree a collapse of the single currency would lead to a severe recession throughout Europe, Italy may well suffer less than most — especially if it were to pay back its debt with a new currency that it controls and can devalue, and if it achieves a budget surplus next year as it is forecast to do.

Monti, an economist by training, has pushed hard to reform Italy's labor market to help create new jobs.

Italy's lower Chamber of Deputies gave final parliamentary approval Wednesday to a package of reforms making it easier to fire workers. Italian business leaders have long complained that strict rules protecting workers make them reluctant to take on new hires.

The International Monetary Fund says the labor market reforms could boost Italian growth.

Appointed to save Italy from financial disaster in the spreading eurozone crisis, Monti has so far enjoyed wide support in Parliament and the labor law was approved by a comfortable margin.

But the austerity measures and increased taxes he has pressed through have tried Italians' patience. Political leaders, with an eye to a spring 2013 election, are starting to get nervous about the price of their continued support for Monti.

Berlusconi, in his newfound role as a euro-skeptic, is waiting in the wings.

Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.