A leaked letter written by the president of the European Central Bank, Jean Claude Trichet, and sent to the Italian Prime Minister Silvio Berlusconi, has illustrated that the bank is putting pressure on Italy to take tough measures in order to reduce its deficit.
The letter was dated 5th August 2011 and its content included claims from the ECB that it is vital that Italy takes quick and drastic action due to the seriousness of its economic situation. In addition, it was demanded that Italy make these changes by the end of September.
The ECB urged Mr Berlusconi to take actions to improve the current labour laws such as changing the rules regarding employing and dismissing employees. It stated that these sorts of actions needed to be taken in order to give confidence back to investors and reassure worried markets that Italy will not collapse as a result of the eurozone debt crisis.
Just a few days after the date of the letter, the ECB declared it would buy Italian bonds in an attempt to reduce the country’s cost of borrowing, however the bank has insisted that this was related to the demands it imposed on Italy.
The letter also suggested that Italy should aspire to have the deficit reduced to 1% of its GDP by next year and have the budget balanced a year earlier than is currently expected. It claimed that this should be achieved through cutting its spending.
Earlier this month, and after the receipt of the letter, Italy approved a 60Bn euro austerity strategy to improve its economic situation. The package included some changes to tax and budgets.
An Italian newspaper published the letter yesterday, and opposing political parties responded by claiming that it was sufficient proof that Mr Berlusconi had been leaning on advice from the ECB in making his decisions.
Despite the ECB’s purchase of Italian bonds worth 6.9bn euros, the country’s borrowing costs have not yet reduced. This is due to increased interest rates.
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