March 26 (Bloomberg) -- Italy’s Prime Minister Mario Monti warned that Spain could reignite the European debt crisis as euro-area ministers this week prepare a deal to strengthen the region’s financial firewall.
Monti pointed to Spain’s struggle to control its finances ahead of a finance ministers meeting in Copenhagen starting on March 30, where officials will seek agreement to raise a 500 billion-euro ($664 billion) ceiling on bailout funding.
“It doesn’t take much to recreate risks of contagion,” Monti said during the weekend at a conference in Cernobbio, Italy. Days after his Cabinet approved a bill to overhaul Italy’s labor laws, Monti praised Spain’s efforts to loosen work regulations while advising it to focus on cutting the national budget. Spain “hasn’t paid enough attention to its public accounts,” he said.
The euro crisis has eased after the European Central Bank last month boosted liquidity through three-year loans to banks, while European Union leaders this month sealed a second Greek bailout package. Italian and German confidence indexes rose today as Spanish and Italian bonds gained.
EU Economic and Monetary Affairs Commissioner Olli Rehn said he was confident ministers will resolve their differences on providing more bailout funding for the euro. Speaking yesterday to reporters in Saariselkae, Finland, Rehn said that officials “will take a convincing decision on the reinforcement of the firewalls.”
Euro-area leaders have established two bailout funds, the temporary European Financial Stability Facility and the permanent 500 billion-euro European Stability Mechanism, which is scheduled to begin operations this year. Under current rules, unused EFSF funds would be passed on to the ESM, though disbursement could not exceed the half-trillion limit.
Policy makers are discussing how to add to the funds, for example by allowing the EFSF and ESM to work concurrently to make more money available. Keeping sums deployed from the temporary fund while allowing the ESM to operate at capacity would bring a total crisis backstop to 692 billion euros.
German Chancellor Angela Merkel and her finance minister, Wolfgang Schaeuble, have abandoned their opposition to combining the two funds, Der Spiegel reported yesterday, citing unnamed government officials. The two leaders have agreed that the EFSF and ESM may be “in operation” for a transitional period, the magazine reported.
The focus by policy makers and investors has shifted over recent weeks from Greece to Spain, where Prime Minister Mariano Rajoy is struggling to reduce the country’s budget deficit in the face of a looming recession.
Rajoy faces his first general strike on March 29 as unions protest against changes to employment laws making it cheaper to fire workers and cut wages. Three months after coming to power, he is due to present the 2012 budget on March 30, which is designed to cut the deficit.
Meanwhile, Rajoy failed to win an outright majority in elections for Spain’s most populous region, Andalusia, last night. Even though his People’s Party took more seats in the legislature than any other, it fell short of the 55 needed. The region has been controlled by the Socialists since Spain’s return to democracy in 1978
The conundrum for European leaders was underscored on March 22, when a report showed that euro-area services and manufacturing output contracted more than economists forecast. The drop in March on declining domestic demand added to signs that the region’s economy is sliding into recession.
Relief From ECB
Leaders struggling to resolve the crisis have been given some space by the ECB’s three-year loans to banks, made between December and February. Speaking at the seminar he hosted in Saariselkae, north of the Arctic Circle, Prime Minister Jyrki Katainen warned that crisis management “can’t be outsourced” to the region’s central bank.
“While more than a trillion euros is not exactly small change,” the ECB’s loans “have certainly not solved the euro area’s problems once and for all,” Joachim Fels, chief economist at Morgan Stanley, wrote in a note yesterday.
As he lauded Rajoy’s efforts to loosen rules on employee dismissals, Monti pushed a bill to overhaul Italy’s labor laws through Cabinet on March 23, facing down opposition from unions and political allies needed to pass the measure in parliament.
Illustrating the difficulties in establishing consensus for change, Pier Luigi Bersani, the head of the Democratic Party on whom Monti relies for backing in parliament, has said he will seek to get the law amended during debate. The CGIL, Italy’s biggest union, has called a general strike.
The Italian premier, in office since replacing Silvio Berlusconi in November, opted not to force through a decree that would have implemented the measures immediately.
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