The politicians in Rome are getting restive, raising concern about the continued survival of the reforms being introduced by the new government. Separately, Italy has been described as the frontline for the battle to save the euro because, unlike the peripheral economies of Greece, Portugal and Ireland, Italy is too big to bail out.
People that do not know Italy are quick to jump to conclusions about its economy. Nielsen noted Italy’s 2011 export growth to November was about double the UK’s, “showing things are adjusting, yet it is stunning people have pre-set views in their minds that sidetrack their analysis. If people say there is a significant risk of a downgrade it becomes a self-fulfilling prophecy. There is clearly a buyers’ strike out there, and no-one wants to be the first.”
David Riley, Fitch’s head of global sovereign ratings, said that as Italian bonds get cheaper, buyers become scarce. The widening spreads, far from being seen as an investment opportunity, are stoking fears that Italy is insolvent.
“Spreads over 400bps cannot be afforded by Italy, they can be sustained for only a period of time. The concern we have is not only whether Italy too big to fail, but is it too big to save? It is difficult to foresee a rescue package big enough to save it,” Nielsen said.
Despite the fears, the political will of the European Union leaders remains undiminished. Herman Van Rompuy, President of the European Council, travelled to Rome to praise Monti publicly for his “extraordinary” efforts to reform the Italian economy.
Rompuy said Monti had presented him with a new package of measures to promote growth, starting with a liberalisation of the economy, which he intends to adopt in the coming days before presenting it to the Parliament. “Their adoption is crucial for market confidence,” Rompuy said.
Rompuy also chose the meeting to announce further structural reforms at EU level that were going to enable EU leaders to deal with the crisis. He said: “I can assert today that we will agree on the new fiscal compact Treaty at the end of this month and we will sign it early March.”
He added that “our crisis mechanisms are being strengthened. The European Stability Mechanism (ESM) will enter into force in July 2012, earlier than planned. We will also assess the adequacy of the EFSFESM’s size without delay. We are working with our international partners to increase IMF resources, for which euro area Members have already announced a contribution of €150bn.”