MILAN, May 13 (Reuters) - Italy’s new government should take a bold but unpopular step of asking for international financial aid to reform its banks and its economy for the long term, former European Central Bank board member Lorenzo Bini Smaghi said on Monday.
Although Rome’s borrowing costs have halved since November 2011, when Italy was at the centre of the euro zone debt crisis, its economy is in dire straits and shock therapy is needed, Bini Smaghi said.
“Italy is in a dramatic situation. It needs unconventional measures aimed at radically changing the way the country and its economy work,” Bini Smaghi, who left the ECB last year, said on the sidelines of a conference in Milan.
The euro zone’s third-largest economy is mired in its longest recession for 20 years and is not expected to start growing until the second half of this year at the earliest.
Nearly four out of every 10 young Italians are unemployed, while companies are struggling to obtain bank funding and an uncertain political outlook is discouraging investment.
In this situation, Italy should apply for a precautionary programme of aid, similar to the one it was offered in 2011 and in 2012 by its international partners, Bini Smaghi said.
“If the new government asked for international help, a bold reform plan would have to be negotiated, and this would drastically reduce uncertainty over the medium term,” he said.
Without a binding reform plan, the fragile left-right coalition may delay reforms until it is forced by a market turnaround into harsh austerity measures, he warned.
Bini Smash’s recently published book called “Dying of Austerity: European Democracies in a Corner” criticises many euro zone countries of failing to reform their economies. (Additional reporting by Elvira Pollina in Milan, editing by Gavin Jones and Jane Baird)