–Sees Risk Of “Vicious Circle” On Growth In Italy

ROME (MNI) – European Central Bank Governor Ignazio Visco called
for the 17 member nations of the Eurozone to pursue banking and fiscal
union in order to mitigate the effects of the current crisis that are
undermining the foundations of the single currency.

Visco, who heads the Bank of Italy, said the euro crisis reflects
two risk factors. The first is “the weakness of some of the members,
which fuels doubt over the sustainability of their public debt.” The
second is the incomplete integration of Europe, which is “the foundation
of the more general concerns about the reversibility of the monetary
union,” he said.

In order to definitively overcome the concerns about the survival
of the monetary union, it is necessary to proceed from the current
economic and monetary union towards political union, in a gradual
process that requires reform of economic governance, as well as the
establishment both of a banking and a fiscal union, he said.

Visco, who was speaking at conference organized by the Italian
Banking Association, said this would be a “long-term process.”

With regard to his own country, Visco warned there was the “risk of
a vicious circle” in which economic growth could be restrained by
declining consumer and business confidence, as well as sovereign debt
concerns, tension on credit markets and a slowing global economy. These
growth-dampening factors need to be mitigated before an economic
recovery can take place, he said.

Last month the Italian government sharply slashed its economic
forecasts to predict a 2.4% contraction this year, double the 1.2% drop
it had projected in April. The economy is expected to continue shrinking
by 0.2% next year, according to the same revised document. The
government cited a broader deterioration in the Eurozone’s financial and
macroeconomic outlook as the main reason for the growth downgrade.

Visco said one of the effects of the economic crisis was that it
had reduced the propensity of Italians to save. However, the savings
rate in Italy, formerly among the highest in the industrialized world,
has been declining now for more than twenty years. This trend has been
accentuated by the current crisis.

The Italian savings rate is currently below 17%, some four
percentage points below the rate in the 2000-2005 period, and below
Germany’s 22%.

Italy’s President Giorgio Napolitano, who sent a written message to
the conference, that economic recovery in Italy “is being made more
difficult by the sense of uncertainty that is pervasive with many
savers.”

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