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Italy’s Monti Sees Agreement on EU Firewalls: Interview

The following are comments by Italian Prime Minister Mario Monti made in an interview.

On whether he would serve a second term if asked by whatever parties win elections next year:

“If I do with my colleagues in government our job very well, I don’t think it’s very likely that I will be asked.”

On the need for Europe to reach an agreement to increase the size and scope of its financial firewalls to stop debt-crisis contagion:

“This topic is important. It will be reviewed by the European Union in the course of the month of March. I believe that size matters as well as the timing of its activation, if needed, and also the governance rules because it has to be mobilized quickly if there is a need. And of course, the better the firewalls are from these three points of view, the least likely it will be that use will be made of them.”

On Germany opting not to discuss the issue of firewalls at a summit in Brussels:

“They didn’t say they don’t want to discuss this in March; they prefer not to discuss this on the first of March. March has, luckily enough, 31 days.”

So you’re confident about a deal to raise firewalls by the end of March:

“I am confident, yes.”

On his statement that Germany needs to help lower interest rates of nations that reach fiscal goals:

“This discussion about firewalls is a case in point. Italy is now approaching this discussion in a more relaxed way than might have been the case in November or December because I believe that we are in a more comfortable position now. So it is easier for us now to make the point that this serves the general interest, and it is important that in this not brilliant phase of the European economy, those efforts which are made by many of our countries in terms of fiscal consolidation can be rewarded by sizable declines in interest rates so that this creates some slightly greater room for growth, both in the public sector budget and also in the accounts of enterprises. These things are happening; in the case of Italy they are indeed happening. If the approach to firewalls will be constructive enough in Europe, I believe we will all be in a better position to face any further contagion effect or any resurgence of a crisis.”

On whether stronger firewalls will reduce the need for European Central Bank special lending operations:

“Presumably yes, but I think it’s very important for governments not to comment on what the ECB does in its wisdom and in its autonomy. May I simply complement your analysis by saying that the decline in interest rates recently has been no doubt to a large extent the result of the ECB’s interventions vis-à-vis the banks; but also, I think we can say, also of the considerable progress in the budgetary consolidation efforts in the countries like Italy.”

On what is still needed to prevent future contagion from the debt crisis:

“One is the firewalls, but the other one is a real pillar and that is growth. In the medium term it will not be a high degree as required by the fiscal compact, a high degree of fiscal budget discipline will not be sustainable unless there is more growth than we are seeing now in Europe.

“For all the difficulties that the discussion on firewalls may bring with it, it is certainly easier to put in place firewalls than to increase the growth rate of the European economy, but it’s very important also to have growth finally also because it’s very important to complete the culture of transformation that we have been having in Europe thanks to the euro and to the Maastricht Treaty, and it’s important that all our public opinions become persuaded that a balanced budget is not inconsistent with growth on the contrary, in the longer term, it’s a requirement for growth. It’s a necessary condition but it’s not a sufficient condition.

“To have growth we have to have a sound fiscal environment in place but all the other weapons for growth including, which is something I very much appreciate, extracting more energies for growth from the integration process of the European economy, hence the single market.”

What if yield spreads begin rising again:

“That would not be pleasant. I don’t think it is likely. But it may always happen. The unpredictability of spreads is not negligible. But we see now in the case of Italy a steady, although gradual decline in the last several weeks. I don’t see honestly any reasons why this course should change.”

On the letter signed by 12 euro region nations encouraging the region to adopt more policies to spur economic growth:

“If we look at the geography behind the signatures below the letter, it’s not a matter of south or north. I think all of Europe is interested in now focusing more on growth, and I believe that if some countries do not appear as signatories to this letter, this does not mean in the least that they are less interested in growth, but the point I have been making is that if, say, in the case of Greece, we had not come to an agreement on the second package, this might have brought a brutal outcome for Greece; this might have generated contagion effects flowing to Spain, Italy, in spite of the good progress being made by these countries; and this might have created angst or backlash against discipline. Discipline to me is extremely important, just as growth, but also discipline we should have not a short term approach but a slightly more long view. And it is important that discipline be cultivated in a persistent manner. For example, I think it would be very detrimental to have again a repetition of what was seen in Europe in the early 2000s when actors concentrated their efforts to reach the 3 percent; then we saw, of all countries, we saw Germany and France suddenly no longer inclined to keep that discipline; in fact, they brought down the stability pact and it took 8 or 9 years to rebuild it.”

On comments by German political leaders about Europe now being in a better position to withstand a Greek default:

“When I heard the statements, I don’t remember whether it was Minister Schaeuble or others. At any rate it was more than one personality saying it a few weeks ago that thanks to progress made by Italy and Spain we could all in Europe be more reassured that whatever may have happened to Greece would not have triggered a contagious crisis. I always responded I don’t believe that anybody could be sure of this because it would be a rather unpredictable scenario and sequence of events. Better not to do the experiment.

“It was in that context that I made the comment that there might be a backlash in terms of public opinion that due to a lack of an agreement on Greece, we had seen the spreads in case of Italy and Spain to go up again to the sky, that would discourage our domestic public opinions from the notion that persistent discipline will bring rewards.”

On whether investors should be concerned that an agreement for Greek bondholders to accept writedowns on their debt will be applied to other countries:

“I think the leaders who invented the PSI, the private sector involvement, have recently been very clear in underlining that this was a once for all application of this concept; so I don’t think that the markets would expect something similar to happen in other cases.”

On the possibility of falling bond yields and gains from tax evasion, leading to a smaller-than-forecasts deficit this year:

“As to windfall gains as you call them, out of a strongly enhanced effort of fighting tax evasion, there’s more than windfall perhaps; it’s really calling the Italian people to a new attitude vis-à-vis taxation, calling them through persuasion and through more effective instruments than mere persuasion. We have adopted a very, very prudent attitude and we want to continue in this very prudent attitude. The Italian government already, before I was appointed prime minister, had committed with the European Union to a balanced budget by 2013 which is a couple of years earlier than the other EU member states. And that’s a very tough constraint, but we’ll stick to it, we think it is even healthy.

“So, we will certainly not indulge in decreasing the pressure toward budgetary consolidation if we see initial results; but certainly, the more interest rates come down, the more tax evasion is brought under control, the more objective, very ambitious and already realistic of a balanced budget in 2013, will be felt to be credible even by the most skeptical market investors. And we expect this to generate an increasingly positive view about Italian risk and investment in Italy.”

On why his deficit reduction plan relied more on revenue increases than spending cuts:

“I think cutting costs is more difficult everywhere relative to tax increases, but I think this was particularly the case not so much because of any Italian specificity, but because of the emergency in which we had to act: only 17 days after our oath of office, this government adopted a decree law with all the budgetary containment measures. And it’s not easy in such a short time to go to a surgical incision of spending; now of course, we have going on a spending review, which will deliver more on the spending side of the slate. And I should also add that because we were very prudent in incorporating 7 percent or so interest rate forecast in the budget, what we come out exposed will be in fact a decline on the expenditure side in terms of interest rate spending.”

On what he wants from talks to overhaul the country’s labor laws:

“The final objective to which we will stick is to increase the competitiveness of the Italian economy, which implies a higher productivity growth, which implies more efficiency, which implies more labor mobility and which is consistent, if we are able to modernize labor market and our welfare system, more labor mobility will still be consistent with a reasonably high degree of social protection but exercised in a way more similar to the Nordic cases in Europe, that is, through the protection of the individual workers but not of the individual jobs often made obsolete by technical or productive evolution. And we will be really demanding in terms of what the final objective will be. I’m confident that this decisive step of modernization of the Italian economy is by now understood by public opinion and by the unions. Of course as a last resort, we want to keep our options in tact if there is a need to go to parliament and introduce change, but I’m confident that we will have the backing of the social partners.”

On whether his economic changes aim to change Italy’s culture that will require a generation:

“It’s exactly that: a generational change that we are kick-starting. So we will not complete a generational change, that is a change which normally requires a generation, in 12 or 15 months. But it’s important to kick-start it. But is it not something very unusual to have in place a government that has been demanded by the political parties, in support of which the political parties are abstaining some of their past practices? They are helping us to help them and the country to deploy a new approach to public decision making. I believe Italian citizens are perceiving this. I believe also that elsewhere in the world that it is perceived that Italy is shifting gear toward a somewhat less Byzantine and non-transparent way of decision making. Some people even say this is parliamentary democracy at its best because we put proposals to parliament, there is much less ex-ante discouragement by this or that party.”

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