ROME (Reuters) - European Central Bank President Jean-Claude Trichet told Italy’s struggling center-right government to deliver on its promised austerity package, adding to international pressure on weakened premier Silvio Berlusconi.
ECB support is vital because the Frankfurt-based central bank has been buying Italian bonds in markets to keep yields low enough for Rome to continue borrowing without needing outright aid from the EU or IMF.
Trichet said measures promised on Aug 5, when Berlusconi said he would balance the budget by 2013 and launch major economic reforms, were “extremely important.”
“It is therefore essential that the objectives announced for the improvement of public finances be fully confirmed and implemented,” he said in an interview with Italian business daily Il Sole 24 Ore on Friday.
Trichet’s comments underline rising concern at Italy’s haphazard progress in agreeing measures to bring its strained public finances under control, joining the Bank of Italy, the European Commission and employers’ federation Confindustria.
Hans-Werner Sinn, head of Germany’s influential IFO economics research institute, said on Friday Italy had visibly slackened its efforts to rein in its deficit ever since the ECB stepped into the market.
Hampered by deep political and personal divisions, the government has struggled to come up with a coherent plan since the August 5 pledge, proposing and then rapidly abandoning a series of measures from a tax on high earners to changes on pension rules.
Ministers have insisted the commitments will be respected but critics from the hardline CGIL trade union to Confindustria have blasted the flip-flopping. The employers’ federation described the measures on Thursday as “weak and inadequate.”
Berlusconi, already reeling from a string of scandals, was hit by fresh revelations from an extortion court case on Thursday. His isolation was underlined by bitter comments from a police wiretap in July in which he spoke of leaving “this shitty country” in a few months and said he was “disgusted” with Italy.
Market doubts about Italy and its 1.9 trillion euro debt pile have been reflected in the yields on 10-year government bonds, which have crept up steadily since the ECB intervened last month to buy Italian paper.
Yields on the bonds, which had fallen from record levels of over 6 percent last month, have since come back up to 5.24 percent. Economists generally agree levels around 7 percent would be unsustainable for the government.
Spreads over benchmark German bonds also widened on Friday to 320 points -- the widest since the ECB started buying Italian debt.
Speaking in Paris late on Thursday, Berlusconi vowed to continue and angrily brushed off the latest scandal, set off by the arrest of a businessman accused of extorting hundreds of thousands of euros from the premier over a prostitution affair.
But it has added to doubts about whether the government has the necessary focus and discipline to implement measures now being anxiously watched across the euro zone, which could not survive a Greek-style crisis in its third largest economy.
Berlusconi’s government has been limping badly since last year when an internal party split brought it close to collapse. The center-right coalition has since re-established a working parliamentary majority but persistent infighting has meant that speculation of an early election is never far away.
The ECB has itself come under pressure over its agreement to provide a shield to Italy which it cannot now withdraw without risking a market crisis that would threaten the whole currency bloc.
“It was definitely wrong. It’s not up to the ECB to buy Italian bonds because this is an indirect form of financing the government budget,” Ifo president Sinn, one of Germany’s most prominent economists, told Reuters in an interview.
He said the central bank intervention had reduced pressure on Italy to clean up its act, although a German government spokesman said on Friday that Berlin was “fully confident the Italian government’s measures will meet their objectives.”
In his comments to Il Sole 24 Ore, Trichet made no direct comment on the merits of the 45.5 billion euro ($64.8 billion) austerity package currently making its way through parliament, but other policymakers have been more blunt.
Austria’s central bank governor and ECB council member Ewald Nowotny said Italy could not be allowed to backslide on the commitments made last month when markets were pushing its borrowing costs out of control.
“I take this very seriously and I see this also as a question of the credibility of Italy’s cooperation with the European program,” he told reporters.
The ECB wrote to the Italian government before intervening in the market, apparently laying out demands for action on consolidating the budget, although the exact terms of what it required have not been revealed.
Trichet denied that there had been a direct, negotiated agreement, saying merely that the central banks had provided its analysis of the situation.
But Nowotny said there was a direct link between the ECB’s bond buying and Italy’s commitment to reform.
“It is fully clear and this is no secret that this program was started on the basis of a letter that was sent to the Italian government and that had certain considerations ... on how Italian state finances could be put on a sustainable path again.”
Additional reporting by Michael Shields in Alpbach, Stephen Brown in Berlin and Francesca Landini and Michel Rose in Cernobbio; editing by Michael Stott/Ruth Pitchford