Time for a breakthrough

Italy's key borrowing rate on Wednesday breached the 7 percent threshold seen as the tipping point to making new loans unsustainable. The European Central Bank (ECB) intervened, buying large amounts of Italian bonds.

When their borrowing costs reached similar levels, Greece, Ireland and Portugal were forced to seek bailouts.

Italy appears to have replaced Greece at the center of the eurozone debt crisis and is on the verge of requiring a bailout that Europe cannot afford to give. Unlike Greece, many observers believe an Italian default would threaten the entire euro project.

Italy's president stepped in to calm worried markets, saying urgent action would be taken to end the political crisis. "Italy must regain credibility and confidence," Giorgio Napolitano said. He added that a new government would be formed "within a short time, or parliament will be dissolved and new elections would be called.

In Brussels, a spokesman for EU Economy Commissioner Olli Rehn told reporters, "The commissioner was worried yesterday and remains concerned today."

A call for structural reforms

German Chancellor Angela Merkel also voiced concern. Merkel said Wednesday that the Italian government has presented a plan that must now be implemented.

"Credible implementation will help Italy regain the credit markets' trust," she said. "At the moment, trust is a rare thing that we need more of."

The German chancellor also made it clear Europe needed more than "declarations of intent" to convince markets it can cut its huge debt, liberalize the labor market, attack tax evasion and boost productivity.

Merkel told a conference in Berlin the debt crisis provided an opportunity for countries such as Greece and Italy to implement urgently needed political and economic reforms but that they must now follow through.

"This is the time for a breakthrough to a new Europe. This is a time for a change toward more sustainability," Merkel said. She stressed that the European Union was "not viable" without treaty changes that would place stricter controls on public finances, allowing the bloc to become a "stability union."

"Europe is in crisis," Merkel said. "The world will not wait for Europe."

Other policymakers have also called for more decisive action to stop the crisis from spreading.

IMF to oversee reform efforts

Christine Lagarde, head of the International Monetary Fund (IMF), told a financial forum in Beijing that Europe's debt crisis risked plunging the global economy into a Japan-style "lost decade."

"Our sense is that if we do not act boldly and if we do not act together, the economy around the world runs the risk of a downward spiral of uncertainty, financial instability and potential collapse of global demand," she said.

Eurozone finance ministers agreed on Monday on a roadmap for leveraging the 17-nation currency bloc's 440-billion-euro ($600 billion) rescue fund to shield larger economies like Italy and Spain from a possible Greek default.

But there are doubts that, in view of Italy's debt totalling around 1.9 trillion euros ($2.6 trillion), even a larger bailout fund could not be sufficient.

Meanwhile, the uncertainty of what kind of government will eventually lead Italy is contributing to market instability. Once Berlusconi resigns, President Napolitano must call early elections or decide on an interim government - maybe even a government that could hold a majority in parliament to finish the legislative period, which runs into 2013.

Author: Dagmar Breitenbach (AFP, dpa, Reuters)
Editor: Ben Knight