Italian Prime Minister Mario Monti’s looming resignation this week may threaten progress in fighting the three-year debt crisis even as European leaders wrap up the year with newly won breathing room.
Monti, under pressure from euro-area and business leaders to enter the Italian election campaign, plans to quit once parliament passes his budget this week.
Former Prime Minister Silvio Berlusconi withdrew support from Monti’s government of non-politicians Dec. 6. The Italian upper house starts debate on the budget, which will then pass to the lower house.
The European Union summit last week closed out a year in which policymakers bolstered the 17-nation single currency by setting up fiscal rules for indebted states, a permanent bailout fund, a central-bank bond-buying program and a road map for tighter banking and fiscal union.
Work was overshadowed this month when Berlusconi pulled his support and pledged to return to power for the fourth time, only to backtrack as long as Monti forms what he called a “coalition of moderates.”
“None of the likely outcomes will derail last year’s reform process,” Erik Nielsen, London-based chief global economist at UniCredit SpA, wrote in a note to clients, referring to the Italian election, which will probably be held in February. “That said, it requires close monitoring.”
The euro climbed to the highest level against the U.S. dollar since May and Spanish bonds advanced for a third week in four on optimism that the turmoil is being contained.
EU policymakers last week made progress in creating a central bank supervisory body and signed off on the next aid tranche for Greece, where the crisis began in October 2009.
EU leaders will be challenged in 2013 as they try to overcome Franco-German differences on how to forge closer fiscal ties and as an economic downturn complicates efforts to scale back debt while buoying employment.
“We still have a stretch ahead and we’re beginning to sense in Germany that we can’t ignore economic growth and employment in other countries,” German Chancellor Angela Merkel said Dec. 15 in a weekly podcast.
“I’m going into the new year optimistically, but also prudently, because we’re seeing here that economic growth is slowing a bit.”
