EUROPE'S debt crisis has entered a new phase and policymakers must come up with a "clear" response to stop the contagion that threatens the region's single currency, the European Central Bank's incoming president Mario Draghi said yesterday.
"It's now necessary for those trying to manage the sovereign crisis to give certainty, to define with clarity the political objectives, the scope of the instruments and the amount of resources available," Mr Draghi said in a speech in Rome.
"It's a necessary step to ensure the stability of the euro area and its currency."
European governments could no longer count on their financing costs remaining similar to those of Germany, the region's strongest economy, simply because of their participation in the single currency, he said.
"The solvency of the sovereign states is no longer something acquired, but something earned with high and sustainable growth, which is only possible if budgets are in order," said Mr Draghi. "Today's cost of credit reflects that new reality."
Mr Draghi's comments at the annual meeting of Italy's banking association came after Italian bonds and stocks plunged this week on concern the country would struggle to reduce the eurozone's second-biggest debt. The yield on Italy's 10-year bond reached the highest since 1997 and financing costs at a sale of treasury bills surged on investor concerns that Italy would be the next victim of the region's debt crisis.
Italian Finance Minister Giulio Tremonti, speaking at the same conference, said a deficit plan would be passed by both houses of parliament by tomorrow. Opposition parties have agreed to ease passage of the measure in the legislature.
"Italian politicians decided to respond firmly to market concerns over the credibility and implementation of the €40bn fiscal package," said Fabio Fois, European economist at Barclays Capital in London. "These are clearly positive developments. The fiscal plan was originally supposed to be voted on at the beginning of August."
The deficit plan was "an important step in strengthening the public accounts" that would help reduce the debt, Mr Draghi said. He also called on the government to explain details of additional measures for 2014 that would be needed to achieve the balanced budget.
Austerity measures wouldn't be enough for Italy and other eurozone countries to reduce debt if not accompanied by policies to boost economic growth, Mr Draghi added.