Italy came under fierce pressure from the markets and the international community on Thursday to reform its economy and outline plans for after Prime Minister Silvio Berlusconi’s imminent resignation.
The International Monetary Fund called for “political clarity” while the European Commission said Italy’s economic forecasts were wrong and warned that the country’s high borrowing costs would hit the economy within months.
British Prime Minister David Cameron said Italy, the third biggest economy in the 17-nation euro area after France and Germany, was now a “clear and present danger” to the eurozone, adding: “The moment of truth is approaching.”
German Chancellor Angela Merkel said that a clarification of the political course in Rome was “extremely important for Italy’s credibility.”
Meanwhile former EU commissioner Mario Monti emerged as the frontrunner to replace Berlusconi after a parliamentary revolt forced the 75-year-old tycoon to announce he would resign after adoption of a package of economic reforms.
Berlusconi has stayed out of the public eye since his announcement on Tuesday but he has been holding frantic talks with political leaders and gave Monti his implicit endorsement on the grounds of national interests.
“Act quickly,” read a headline on business daily Il Sole 24 Ore.
Monti also received backing from Italy’s main employers federation Confindustria but his appointment is still far from a done deal as parts of Berlusconi’s center-right coalition are insisting on early elections.
Berlusconi has promised to step down as soon as parliament approves a series of measures including a reform of labor laws to facilitate hiring.
The Senate, or upper house, is set to vote on the package on Friday and the Chamber of Deputies, or lower house, will vote on Saturday or Sunday.
The 68-year-old Monti earned a fearless reputation as the European Union’s competition commissioner taking on U.S. corporate giants Microsoft and General Electric and is seen as a possible head of a national unity government.
“Italy is facing a difficult time and particularly arduous choices to overcome the crisis,” said President Giorgio Napolitano, who will be forced to call early elections if there is no consensus on a new government.
“Europe is urgently awaiting important signals of a taking on of responsibility by one of its founders. We will be up to the task,” he said.
The European Commission has warned Italy may need to adopt “extra measures” in order to meet its target of balancing the budget by 2013.
The Commission on Thursday forecast Italy’s growth rate will slow to just 0.1 percent in 2012 − far below the government’s forecast of 0.7 percent.
It also warned that Italy would fail to reduce its deficit to 1.6 percent of output next year as planned and the level would instead be 2.3 percent.
The EU’s Economic Affairs Commissioner Olli Rehn also said the spike in bond yields for Italy from next year “would have a significant impact on the financing conditions and thus also growth of the real economy.”
Italy paid a record rate of 6.087 percent to sell 5.0 billion euros in 12-month Treasury bills − the highest rate since the introduction of the euro.
The yield on 10-year bonds has risen to above 7.0 percent − a level seen as unsustainable for Italy to avoid a blow-up on its 1.9-trillion euro ($2.6-trillion) debt particularly as economic growth remains anemic.
But market pressure eased slightly later on Thursday with the rate falling below 7.0 percent and the stock market rallying.
Even shares in Berlusconi’s business empire Mediaset, which dropped almost 12 percent on Wednesday, were up more than 3.0 percent.
European Union and European Central Bank auditors arrived in Rome this week as part of special EU-IMF surveillance that Berlusconi reluctantly agreed to at the G20 summit of world leaders last week.
The rise in rates has fanned fears around the world that Italy could be the next eurozone economy to be forced to seek a bailout in a debt crisis that has already put Greece, Ireland and Portugal on their knees.
The ECB has stepped in to prop up Italy’s bond market but there are multiple warnings that the Italian economy is simply “too big to bail” if rates reach a level that effectively cuts off access to debt markets.
There was also more bad news on the economy after new data showed industrial production fell 4.8 percent in September − its worst monthly drop since the start of the global financial crisis in 2008.
Berlusconi had promised his fellow eurozone leaders that he would overhaul Italy’s pensions system and accelerate sales of state assets, but the reforms have stalled to the intense frustration of Germany and others.