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Italy’s Letta Says Markets Underestimate Risk of U.K. Leaving EU

Italy's Prime Minister Enrico Letta
In the Bloomberg interview Enrico Letta, Italy's prime minister, reiterated his promise to ensure Italy remains within the EU’s budget deficit limit of under 3 percent saying he’ll achieve the goal through fiscal adjustments and cuts in expenditure. Photographer: Gabriel Bouys/AFP/Getty Images

Italian Prime Minister Enrico Letta said a U.K. exit from the European Union would threaten the future of the trading bloc and hailed Angela Merkel’s election victory in Germany.

Markets, politicians and ordinary people “are all under-evaluating the risk of a U.K. exit,” Letta said in an interview with Bloomberg Television’s Erik Schatzker. The other EU nations need to work “a good deal to convince the British to remain on board.”

While the weekend German elections helped stabilize Europe by propelling Chancellor Angela Merkel to a probable third term as leader, the U.K.’s increasing euro skepticism is a cause for future concern, Letta said. U.K. Prime Minister David Cameron has promised a referendum on EU membership by the end of 2017 if a Conservative government is elected in the 2015 vote.

“It is a very tough discussion and the anti-Europe party is rising,” Letta, 47, said in the interview yesterday.

While Cameron has not mentioned specific demands he could make of the EU to avoid an exit, his lawmakers have said they want powers over areas such as justice, policing and worker protection to be returned to national capitals.

Some help in that direction may come from Germany’s Merkel, whose spokesman Steffen Seibert said on Sept. 4 that repatriation of powers was “a sensible idea.” Common ground between the two nations might set up the kind of deal Letta hopes the EU can make to keep the U.K. in Europe, avoiding a crisis of confidence in the 28-nation union.

“It’s in their own interest to stay,” Letta said.

European Parliament

The Italian prime minister, who spent part of his childhood in Strasbourg, France, the official seat of the European parliament, has often spoken out in defense of the EU, saying it is the best way for Europeans to continue to carry weight in an increasingly globalized world.

“Historically Italy is pro-Europe because it’s a country that is more comfortable with external constraints on things like its accounts,” said Giovanni Orsina, a history professor at Luiss Guido Carli University in Rome. Letta is “also a member of that moderate Italian Left that brought the country into the euro-zone so it’s part of his identity.”

In the Bloomberg interview Letta reiterated his promise to ensure Italy remains within the EU’s budget deficit limit of under 3 percent saying he’ll achieve the goal through fiscal adjustments and cuts in expenditure. He declined to say whether he will stop a value-added tax increase planned for October.

Fiscal Adjustments

Italy will need to implement fiscal adjustments of between 2.5 billion euros ($3.4 billion) and 3 billion euros to remain within EU budget deficit limits, Barclays Plc analyst Fabio Fois wrote in a Sept. 23 research note.

“We have to cut expenses, we have to grow and we have to privatize,” Letta said regarding the government’s plans for the future.

Asked whether he would try to block a deal that allows Spain’s Telefonica SA to increase its control over Italian phone company Telecom Italia SpA, Letta said the government would be vigilant but would not put up barriers.

“We are in the European market” and there is no problem with companies doing business, Letta said. The government’s main concern is jobs and the network which is a “strategic asset” for Italy, he said.

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