Neither Italy or Spain will need to be bailed out but both eurozone economic giants need to strictly implement planned reforms, EU Economic Affairs Commissioner Olli Rehn said yesterday as he sought to soothe market concerns that the third and fourth largest economies in the 17-nation eurozone could follow in the footsteps of smaller beleaguered nations Greece, Ireland and Portugal.
Italy and Spain have faced record borrowing costs on markets this week amid fears the pair could be next in line for trouble as Europe’s debt crisis spreads from weaker peripheral countries.
The market unrest seen in the last few days was unjustified “on the grounds of economic fundamentals”, Mr Rehn said. “It is not justified for Italy or for Spain.”
Mr Rehn said the drama on the markets was simply “incomprehensible”, given there had been no major changes in the economies of either nation and that both had committed to ambitious reforms for “fiscal consolidation (and) to put their economies back on track”.
But in the case of Italy, approval and implementation of a welfare reform plan currently before Parliament “should be accelerated” while further labour market reforms and the opening of closed professions “should be prioritised”, Mr Rehn said.
Turning to Spain Mr Rehn welcomed its “bold reforms” while saying that, as for Italy, “forceful implementation is paramount”.
Madrid needed to complete moves to strengthen its banking sector and ensure that fiscal consolidation was strictly implemented at the regional level.
Mr Rehn said the input of G7 and G20 partners will be of “critical importance” in efforts to resolve the spiralling crisis.
“The current turmoil is not just affecting Europe but has a global dimension and global repercussions and ramifications,” he said.
“That’s why the solution has to be global as well.”
The Group of Seven brings Canada, Japan and the United States in alongside non-euro Britain and the eurozone’s top three economies – Germany, France and Italy.
After the United States raised its debt ceiling again this week, fears rose of a renewed global downturn. The Group of 20 also includes major economies such as Brazil, China, India and Russia.
Both bodies were brought in by the eurozone during the final stages of planning for earlier bailouts.
Among the reasons Mr Rehn identified for Italy and Spain facing sharply rising debt risk premiums on bond markets was the general picture of concern outside Europe.
“Investor sentiment has been negatively affected by the impact of the debt ceiling negotiations in the United States and recent data suggesting a soft patch in the global economy,” he added.
Mr Rehn also said Europe’s rescue fund for euro countries in the debt crisis needs a new boost.
“I do not want to enter into any numbers game at this stage,” he said of the €440 billion European Financial Stability Facility. However, “it is indeed the Commission’s long-standing position that the effective lending capacity of the EFSF should be reinforced and its scope for activity widened,” he said.
The EFSF has already been used in bailouts agreed for Ireland and Portugal, and will be used in the second Greek rescue the EU is trying to finalise after it was agreed at a July emergency summit.
“We need to stand ready to adapt our crisis management tools to be credible and effective.”