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Italy's central bank warns against euro exit as election nears
May 31, 2017 / 8:48 AM / in 5 months

Italy's central bank warns against euro exit as election nears

Bank of Italy Governor Ignazio Visco attends the session 'Recharging Europe' in the Swiss mountain resort of Davos January 23, 2015. REUTERS/Ruben Sprich

ROME (Reuters) - Italy’s central bank warned on Wednesday that leaving the euro zone would not solve the country’s economic problems, as two major parties campaign to drop the common currency before an election that may come as soon as this autumn.

The right-wing Northern League wants to pull Italy out of the euro zone, and the anti-establishment 5-Star Movement, which some opinion polls say is now the country’s most popular party, wants to hold a referendum on the issue.

“It is an illusion to think that Italy’s economic problems could be solved more readily outside Economic and Monetary Union,” Bank of Italy Governor Ignazio Visco said in an annual speech to shareholders in Rome.

The parties that favor giving up the euro blame Italy’s chronically slow growth in part on the constraints of euro zone fiscal rules. Elections are due by May 2018, but officials from the main parties say they expect a vote this autumn.

“A departure from the euro, which is often discussed with scant knowledge of the facts, would not serve to heal the structural defects of our economy; it certainly would not lower interest expenses and much less would it magically lower our debt level,” Visco said.

“On the contrary, it would generate serious risks of instability.”

Visco’s six-year, renewable mandate comes to an end in October. The 5-Star Movement, which blames him for failing to prevent a series of bank crises, has said he should not be given another term in office.

Visco said Italy must focus its energies on bringing down its huge public debt, the highest in the euro zone after Greece’s at around 132 percent of gross domestic product.

Debt is “a serious source of vulnerability which weighs on the country’s economy,” Visco said. “An appreciable and lasting decline in the debt-to-GDP ratio must commence without delay.”

“There must be no repeat of past errors: the failure to reduce the ratio of debt to GDP sufficiently in good economic times forced us to make pro-cyclical adjustments during the crisis,” Visco said.

Italy is historically the euro zone’s slowest-growing economy. Its GDP is still more than 7 percent below its level at the start of the global financial crisis in early 2008; GDP in the rest of the currency bloc is now 5 percent higher.

Visco warned that at currently projected rates of growth, Italy’s economy would only return to its 2007 level some time in the first half of the 2020s.

He called for a major overhaul of Italy’s economic policies, with an increase in public investment, a “re-thinking” of tax rates on companies and individuals and a “re-doubling” of efforts to combat tax evasion.

He said Italy’s economy would probably grow around 1 percent this year, broadly in line with the 0.9 percent growth in 2016 and around half the rate expected for the euro zone as a whole.

editing by Steve Scherer, Larry King

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