European Central Bank Executive Board member Joerg Asmussen said the fate of the euro area hinges on whether Italy can turn around its economy.
“The future of the euro area will not be decided in Paris or Berlin, or in Frankfurt or Brussels. It will be decided in Rome,” Asmussen said in a speech in Milan today. “The euro area cannot prosper if its third-largest economy has a potential growth rate of zero. Italy has to grow, and this will not happen by waiting for the cycle to turn.”
Italy’s 1.6 trillion-euro ($2.2 trillion) economy has contracted for eight straight quarters, the longest slump since World War II, as political squabbles distract policy makers from devising a strategy to rekindle growth. Enrico Letta, Italy’s third premier since 2011, is shifting the burden from taxpayers to government bureaucracy in a bid to spur the stagnant economy as deficit-cutting continues.
“The challenges for Italy are long-term and the solution is structural,” Asmussen said. “Italy is too big to be rescued from the outside, it has to make the turnaround on its own. Its fate will critically determine the fate of the euro area.”
The banking union Europe is building will support a recovery in the 17-nation euro region, Asmussen said. The balance-sheet review the ECB will undertake starting next month, as a first step toward it, “is an extraordinary opportunity to rebuild confidence in the banking sector and promote the long overdue repair of bank balance sheets, which in turn is a precondition for a sustainable economic recovery,” he said.
At the same time, “credible national backstops must be put in place,” Asmussen said. “If not, the credibility of the whole exercise is put at risk as the outcome will then almost certainly be negatively perceived by market participants. Doing this balance sheet assessment without a backstop in place would be a bit like getting on a boat in rough weather conditions, and not taking a life jacket on board.”
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