GERMAN Chancellor Angela Merkel praised Italy's new government yesterday for the speed with which it has launched reforms -- prompting Prime Minister Mario Monti to say it was important for markets also to recognise Italian economic policy progress soon.
Speaking at a joint news conference with Mr Monti in Berlin, Ms Merkel said that his technocrat government had been quick to launch budgetary measures and structural reforms aimed at making the Italian economy more competitive in order to boost growth.
Mr Monti, while thanking the Italian people and parliament for what he called their "mature" response to very painful reforms, said his country could only make further progress within a more helpful European environment, including cheaper borrowing.
"The European context must become more favourable by permitting in good time a lowering of interest rates and greater integration of the EU," he said.
Italy still faces 10-year borrowing costs of around 7pc, which are widely viewed as unsustainable for an economy with a debt of around 120pc of GDP.
Rome must refinance tens of billions of debt in the first four months of the year.
Mr Monti said: "In the financial markets, high interest rates could have been justified when markets were diffident about Italian economic policy, but not anymore -- especially after representatives of those same markets have said they appreciated the efforts made."
It was up to Europe to "facilitate the transformation of good policies into lower interest rates", said the Italian leader.
Speaking to investors in Frankfurt, a top ratings-agency analyst said Italy needed more robust support from the European Central Bank in terms of buying its bonds.
However, both the ECB and Germany are deeply reticent about such action.
"It is hard to believe the euro will survive if Italy does not make it through," said David Riley, the head of sovereign ratings for Fitch.
He added that while many saw Italy as too politically and economically important to be allowed to fail, "one might also argue that it is too big to rescue".
That warning pushed the euro down to within touching distance of a new 16-month low versus the dollar.
Ms Merkel's working relationship with Mr Monti's predecessor, Silvio Berlusconi, was very tense and she and French President Nicolas Sarkozy took a tough stance on his reluctance to begin spending cuts once Italy had become a focus of market speculation about the eurozone debt crisis spreading from Greece.
Mr Monti told Ms Merkel: "Europe no longer has to fear Italy as a possible source of contagion for the eurozone, but can count on Italy to play its proper role beside Germany and France and other countries in the drive for stability and growth."
The premier, a former European Commissioner who was appointed in November to try to reassure markets that Italy could manage its debt mountain, confirmed that Ms Merkel and Mr Sarkozy would visit him on January 20 to see for themselves the reforms that his government has begun.
Ms Merkel made clear that the eurozone's top priority at the start of 2012 was to secure a second aid package for Greece, an issue which needed to be resolved before Europe could start working out how to boost growth and jobs.
That hangs on finalising a deal for private creditors to take a 50pc writedown on their Greek bondholdings. However, agreement remains elusive, with time running short.
The German chancellor also said her government would be prepared, if necessary, to pay more capital up front into the eurozone's permanent bailout mechanism, the ESM, which is due to come on stream in the middle of the year.
That statement helped the euro claw back some losses.
Both leaders played down the option, pushed by Mr Sarkozy, of a new financial-transaction tax in the eurozone -- rather than the whole EU -- if non-members of the currency zone, particularly Britain, continue to oppose it.
Mr Monti said Italy saw it working only on a global or EU scale. (Reuters)