Monti Says Merkel, Sarkozy Agree Italy Default Would Lead to End of Euro

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Photographer: Eric Feferberg/AFP/Getty Images

German Chancellor Angela Merkel (L), French President Nicolas Sarkozy (C) and Italian Prime Minister Mario Monti give a press conference during an european mini-summit on the debt crisis on November 24, 2011 in Strasbourg, southern France.

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Photographer: Eric Feferberg/AFP/Getty Images

German Chancellor Angela Merkel (L), French President Nicolas Sarkozy (C) and Italian Prime Minister Mario Monti give a press conference during an european mini-summit on the debt crisis on November 24, 2011 in Strasbourg, southern France. Close

German Chancellor Angela Merkel (L), French President Nicolas Sarkozy (C) and Italian Prime Minister Mario Monti give... Read More

Photographer: Alessia Pierdomenico/Bloomberg

The appointment of European Competition Commissioner Mario Monti as Italian prime minister and the election in Spain of a pro-business party that pledges more budget cuts have failed to lure back investors. Close

The appointment of European Competition Commissioner Mario Monti as Italian prime minister and the election in Spain... Read More

Photographer: Alessia Pierdomenico/Bloomberg

Italy's Prime Minister Mario Monti said in an address to the Senate in Rome today, “The future of the euro also depends on what Italy does.” Close

Italy's Prime Minister Mario Monti said in an address to the Senate in Rome today, “The future of the euro also... Read More

Photographer: Jock Fistick/Bloomberg

Italy’s two-year bonds yielded a euro-era record 7.82 percent, almost 50 basis points more than 10-year notes. Close

Italy’s two-year bonds yielded a euro-era record 7.82 percent, almost 50 basis points more than 10-year notes.

German Chancellor Angela Merkel and French President Nicolas Sarkozy agreed with Prime Minister Mario Monti that Italy succumbing to the region’s debt crisis would lead to the end of the euro, Monti’s office said.

Sarkozy and Merkel “confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro,” Monti told ministers at a Cabinet meeting in Rome today, according to an e-mailed statement. That “would provoke a stalemate in the process of European integration with unpredictable consequences.”

Italy had to pay today almost 7 percent to sell six-month bills at an auction as investors grew concerned that the world’s fourth-biggest borrower and holder of Europe’s second-biggest debt may struggle to control borrowing costs. Merkel said yesterday that Monti has outlined an impressive agenda for Italy that “will promote growth” and may reduce a debt of 1.9 trillion euros ($2.5 trillion). Merkel made her comments at a press conference with Monti and Sarkozy after a meeting in Strasbourg, France.

Monti’s predecessor, Silvio Berlusconi, stepped down as Prime Minister on Nov. 12 as the yield on Italy’s benchmark 10- year bond breached the 7 percent threshold that prompted Greece, Portugal and Ireland to seek bailouts. That yield was at 7.34 percent after today’s auction. The European Central Bank has been purchasing Italian and Spanish debt since Aug. 8 in a bid to stem the two nations’ soaring borrowing costs.

‘Sustainable Consolidation’

Yesterday Monti told Merkel and Sarkozy that “Italy has shown in its recent past to have accomplished significant improvements with regard to fiscal consolidation,” today’s statement by the prime minister’s office said. “The commitment to make such consolidation sustainable will be implemented in short time through pro-growth measures,” the statement added.

Monti reiterated today his government’s commitment to reach a balanced budget in 2013. That forecast contrast with the most recent estimates by the European Union. Italy’s deficit will be 1.2 percent of gross domestic product in 2013 according to a EU report on Nov. 10.

The Italian recovery is coming to a standstill and the Brussels-based commission predicted a contraction of 0.2 percent in the fourth quarter. That will limit economic growth to 0.5 percent this year, less than the previous estimate of 0.7 percent. Growth will slow to 0.1 percent next year, the commission also said.

‘Precarious Equilibrium’

Italy needs to return to growth to cut its debt as rising yields make it difficult to sustain its financing costs, Bank of Italy Governor Ignazio Visco said today in a speech in Catania, Sicily. “The growing tension on financial markets in recent months has made for a precarious equilibrium” in the country’s public finances, Visco said.

The Italian government should pursue an “ambitious” timeframe on reforms and “adopt bold measures to re-launch growth,” EU Economic and Monetary Affairs Commissioner Olli Rehn told lawmakers in Rome today.

Merkel again ruled out joint euro-area borrowing and a bigger role for the ECB in fighting the region’s crisis. The chancellor told reporters in Strasbourg that euro bonds are “not needed and not appropriate” and would “level the difference” in euro-region interest rates.

To contact the reporter on this story: Lorenzo Totaro in Rome at ltotaro@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net

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