Prodi dismisses euro fear

Italian centre-left leader Romano Prodi, still waiting for his election victory to be confirmed, yesterday rejected speculation that his weak majority would scare markets into doubting Italy's ability to stay in the euro.

Italians voted on April 9 and 10 in the closest vote in post-war Italy, granting Mr Prodi a narrow victory that Prime Minister Silvio Berlusconi is still contesting ahead of official confirmation expected later this week.

While chances that Mr Berlusconi will succeed in overturning Mr Prodi's win have faded, Britain's Financial Times wrote that uncertainty remained over whether Mr Prodi could solve the country's economic woes with such a slim parliamentary majority.

"The narrow victory by Romano Prodi's centre-left alliance was the worst possible outcome in terms of Italy's chances to remain in the eurozone beyond 2015," wrote Wolfgang Munchau in a column that was quoted by all of Italy's main news websites.

Mr Munchau said Mr Prodi would be unable to pursue economic reforms necessary to reduce Italy's deficit and debt and that bond markets would begin to price in the risk of it returning to the lira.

"Italy's problem is lack of readiness for life in a monetary union," he wrote. "If Italy continues to lose macroeconomic competitiveness, a populist political movement could well emerge with an agenda for euro withdrawal."

Mr Prodi's spokesman rejected such speculation. "We knew the margins were going to be tiny... If (the election) had ended up 48 per cent against 52, the country would still be divided in two, so I don't think the markets are getting upset by this," Silvio Sircana said.

"The market will look at the policies we implement and then decide whether or not to have faith in us. Up to now the international community has generally viewed favourably the fact that Prodi won and not Berlusconi."

Before the election, most merchant bank economists said they favoured a Prodi victory because of the former European Commission President's commitment to the euro and due to disappointment in Mr Berlusconi's five years in power.

Investors showed no post-election hesitation and snapped up more than five billion euros of five- and 15-year bonds in an offer last Wednesday, perhaps tempted by a recent rise in risk premiums.

Italy narrowly escaped what most analysts said would have been the worst outcome - different majorities in the two parliamentary chambers.

But with a majority of just two senators in the upper house, Mr Prodi's leadership skills will be tested to the maximum as he tries to convince everyone in his coalition - from economic liberals to communists - to take tough economic decisions.

Economists have said Italy needs "shock therapy" to modernise its economy, rein in a budget deficit that hit 4.1 per cent of GDP in 2005, and pay down a debt pile that rose for the first time in a decade last year to 106.4 per cent of GDP.

Italians, traditionally the most pro-European Union population in western Europe, often express their unhappiness with the euro, saying prices soared when they switched from the lira in January 2002.

A junior party in Mr Berlusconi's centre-right government, the Northern League, rattled markets last June when it said it would campaign for a referendum to return to the lira - something economists say would be a disastrous move for a country with the world's third largest national debt.