The reform of the Italian economy is critical to the survival of the euro. But success also depends on external factors out of the Italians’ control.
"Much time will be required to demonstrate to justifiably cautious investors that Italian reforms will address the medium-term problem. But in our view, the time that markets will provide has nearly run out."
EU'S HOPE AMID FEAR
Despite these 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.
He 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.
"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 European Financial Stability Facility (EFSF)/ESM'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." Monti's reforms are only a first step to the rescue of the euro. On a visit to Berlin to meet German Chancellor Angela Merkel, Monti stressed the need to give Italy all the assistance it needs to get the reforms through, to prevent the Eurosceptic populists from gaining ground.
In an interview with Germany's Die Welt, Monti said: "I cannot be successful with my policies if the policies of the EU do not change. If that doesn't happen, Italy - which has always been a pro-European country - could flee into the hands of populists."
Also needed, says the Barclays report, are two external developments. First, a definitive resolution is needed of the debt overhang in Greece and perhaps other fiscally stressed European sovereigns. Second, Italy and other European sovereigns will need help managing market contagion.
The EFSF is not up to the task and has even been downgraded by S&P to AA+. The only solution is for the ECB to be the central banker that everyone except the Germans wants them to be.
"So far, the ECB has been unwilling to accept this revision of its institutional mandate for extremely good reasons that have, unfortunately, been rendered obsolete by the crisis into which the eurozone governments have fallen," Barclays says. "For now, we see no practical alternative that offers the realistic hope of fending off an extremely expensive escalation of the ongoing debt crisis."
As well as the acquiescence of the politicians in Rome, Monti needs the backing of Brussels. The key development is for the ECB to take on a full central banker role in the eurozone. With Draghi in charge and the German grip on the bank diminished, the ECB may finally accept this role, but the clock is ticking.