ROME (MNI) – European Central Bank Governing Council member Ignazio
Visco Thursday urged European leaders to seek additional tools for
fighting the Eurozone crisis above and beyond the European Stability
Mechanism, the EU’s newly-minted bailout fund.

Visco, who is governor of the Bank of Italy, also said that a
banking union in the euro area would be an important step towards the
creation of a common budget. The current political and monetary
structures are not credible, he said.

On Wednesday, the German Constitutional Court approved the nation’s
participation in the ESM, clearing the way for the fund to start
operations, since Germany was the only country not to have ratified it.
Even so, many issues remain unresolved in the single currency area,
including the status of Greece’s bailout package and the question of
whether Spain will seek a bailout deal in order to avail itself of the
recently-announced ECB bond purchasing program.

“The ESM would be insufficient if it were to remain the only
instrument in facing new financial crisis,” Visco told an audience at
Rome University. “The German Constitutional court simply said that the
ESM is legitimate, it did not add anything new to the overall picture.”

The ESM, with lending capacity of E500 billion, is the centerpiece
of the “warchest” created by European leaders to fight the crisis. But
many analysts and some political leaders have argued that it is not big
enough to handle a major setback in the crisis, such as the threat of
default in both Spain and Italy at the same time.

The ESM will finance any future bailouts for troubled EMU
sovereigns, provide “precautionary” credit lines in they are requested,
recapitalize banks and purchase sovereign bonds in the primary market.

Thursday’s German court decision approving it, and last Thursday’s
announcement of the new ECB bond purchasing program, have served to
calm financial markets, pushing the euro to a four-month high against
the dollar and strongly boosting European stocks.

Italian Prime Minister Mario Monti was one of the earliest
proponents of the ESM mechanism. Monti was appointed in November last
year to replace outgoing Premier Silvio Berlusconi as part of a team of
technocrats that were to navigate the rough seas of the euro debt
crisis. But the outlook for Italy has noticeably worsened since he took
the helm.

Economic growth in the Eurozone’s third largest economy has in fact
shrunk for the fifth straight quarter, with gross domestic product
declining 0.8 percent in the second quarter and 2.6 percent on the year,
according to data released Tuesday by national statistics office Istat.

Monti’s government initially gave priority to addressing the
nation’s E1.95 trillion debt load. He introduced an initial E35 billion
package earlier this year, followed by measures equivalent to an
additional E26 billion of spending cuts over the next three years by
laying off some 24,000 government employees.

Monti earlier this week admitted his austerity measures had a
negative effect on the economy, according to newspaper reports.

“Monti’s statement was easy to forecast,” Visco said. “The
stability of the economy and the measures required to ensure this
inevitably had to contribute to the recession for the good of the future
results.”

Even so, this the measures taken so far do not appear to be enough
to slash spending to required levels. Local media have reported that ten
large Italian cities are currently at risk of financial default and the
government over the summer had to introduce a E400 million emergency
package to help salvage Sicily, which would otherwise have faced
bankruptcy.

Since then, and after the Fitch ratings agency urged Monti to focus
on growth-boosting economic reforms, the premier has said his priority
now lies in boosting the economy.

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