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Italy’s Monti Says Europe Needs More Growth, IMF Flexibility

U.S. President Obama, Italy's Prime Minister Monti
Barack Obama, U.S. president, right, meets with Mario Monti, Italy's prime minister. Photographer: Kevin Dietsch/Pool via Bloomberg

European leaders must complement austerity with growth policies while the International Monetary Fund needs more flexibility in providing aid to halt the euro-region’s debt crisis, Italian Prime Minister Mario Monti said.

The European Union’s entire stance “must become more growth-oriented” for countries to get their finances under control, Monti said in a speech in Washington today. The IMF should also show a “broader understanding” for countries receiving aid, while going beyond “strict adherence” to deficit cuts to seek “pragmatic solutions.”

Monti is trying to convince European allies that the response to the debt crisis has been overly reliant on austerity measures that are deepening the region’s economic slump and complicating deficit reduction. Monti’s success at spurring the growth needed to reduce Italy’s $2.5 trillion debt, about four times the size of EU’s bailout fund, may be vital to preventing the 17-nation euro region from breaking up.

“Italy is not in a state where it needs financial support,” Monti said. “But it needs better governance and wants to contribute to better governance”

In a meeting with President Barack Obama after the speech, the two talked about the “imperative of growth,” Monti said. Obama said the Italian prime minister had not only restored faith in Italy, “he’s also been able to generate confidence throughout Europe.”

‘Difficult Time’

“The prime minister came in at a very difficult time in Italian politics and the Italian economy and I just want to say how much we appreciate the strong start that he has embarked on and the very effective measures that he is promoting inside of Italy,” Obama said.

Obama also called on Europe to increase the size of its bailout mechanism and erect a bigger firewall against debt-crisis contagion. Monti travels to New York tomorrow to talk to investors.

“There’s no European more important for Obama to meet right now to understand that European leaders are aware of the problems and are dealing with them,” said Philippe Moreau-Defarges, a researcher at Paris-based French Institute of International Affairs. “There’s no European leader right now who understands better how the global economy works.”

Pushing Back

Monti, 68, an economist who as a European Union competition commissioner in the 1990s told companies such as Microsoft Corp. what to do, has been pushing back against Chancellor Angela Merkel and Germany’s insistence on austerity measures as a panacea for the debt crisis. He also took aim at the IMF today, saying the fund needed to be more flexible in closing a bailout deal with Greece that could lead to a further reduction in borrowing costs.

“It is my understanding that many of us in Europe, including the member states which traditionally are on the side of caution and of discipline, believe that this is the moment to consider that if there is a minimum of compliance with the requirements set out, this is the moment to turn the page and extinguish this potential Greek explosion,” he said.

European finance ministers are meeting in Brussels to review an agreement between Greece and its biggest creditors -- the EU, European Central Bank and the IMF -- on additional budget-cutting measures that would free up a second bailout package worth 130 billion euros ($173 billion) and allow Greece to skirt default.

Bonds Gain

Getting a deal on Greece would ease concern about debt-crisis contagion and help further reduce Italy’s borrowing costs, Monti said. The yield on Italy’s 10-year benchmark bond fell 10 basis points to 5.48 percent, the lowest in more than four months. When Monti took office Nov. 16 it was 7.37 percent, past the 7 percent level that led Greece, Ireland and Portugal to seek bailouts.

Monti leads a government of non-politicians that came to power in November after Prime Minister Silvio Berlusconi resigned when his ruling coalition frayed as it tried to pass deficit cuts. Monti initially adopted some of the policies he is now criticizing, before pivoting to measures to spur growth, competitiveness and productivity. He passed 20 billion euros in budget cuts and tax increases within weeks of his swearing in. 16.

Stagnant Economy

He then moved to reducing regulations he blames for Italy’s stagnant economy, which expanded at an annual average of 0.4 percent in the decade through 2010 compared with 1.2 percent in the euro area. Monti’s Cabinet approved legislation on Jan. 20 to boost competition among so-called closed professions such as notaries and pharmacists. A week later, the Cabinet abolished or loosened regulations in a bid to cut red tape and make it easier to do business.

Monti’s government now faces what may be its toughest task, with Labor Minister Elsa Fornero engaged in talks with unions and executives on easing labor laws. Past efforts to loosen the labor code have led to political violence, including assassinations of economists working on the issue in 1999 and 2002. Monti pledged today to negotiate an agreement by the end of March, saying he wouldn’t have to resort to passing the changes by a decree law.

Interesting Moment

“This is a very interesting moment for all of us to concentrate more on the growth imperatives,” he said. “How can growth be generated in Europe in the context of continued budgetary discipline?” Monti said. “I think most of the extra growth will have to come maybe by coordinated macroeconomic policies at the G-8, G-20 level, but as far as the EU is concerned, mainly it will have to come from structural reform or supply-side measures within Europe.”

Even the stronger European economies have room to further loosen restrictions, he said.

“Even in Germany there is scope for greater liberalization,” he said.

“If Germany fully went to the opening up of its domestic services sector, that will stimulate its own growth” as well as European growth, he said.

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