The European Central Bank’s incoming President Mario Draghi says Europe’s debt crisis has entered a new phase and policy makers must solidify a clear course of action in order to prevent the spread of the contagion and the devaluation of the euro.
“It’s now necessary for those trying to manage the sovereign crisis to give certainty, to define with clarity the political objectives, the scope of the instruments and the amount of resources available,” said Draghi. For sovereign states to remain solvent, they will have to rely on high and sustainable growth, according to Draghi, which is only possible if their budgets are in order. He says that countries can no longer count on more prosperous economies, like that of Germany (NYSE:EWG), propping up the EU and its currency.
The Italian (NYSE:EWI) government has announced a plan to cut 40 billion euros from the nation’s deficit with hopes of balancing the budget by 2014. Italian Finance Minister Giulio Tremonti says the plan will be passed by both houses of parliament by July 15. Opposition parties in the legislature have agreed to the measure. Draghi says the deficit-reduction plan will help strengthen public accounts, but that austerity measures won’t be enough for Italy or other European nations to reduce the debt unless accompanied by policies to boost economic growth.
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Italy’s growth is expected to lag behind the EU average for the next two years. In the first quarter of 2011, Italy’s economy grew 0.1%, only a fraction of the 0.8% growth of the euro area. But in the second quarter, Italian growth was more on pace with the surrounding region. Italy also has the advantage of a solid banking system and a declining jobless rate, which cannot be said for Greece.