New Italian premier urges EU to focus on growth

[May 01, 2013]  BERLIN (AP) -- Italy's new prime minister called Tuesday for European countries to prioritize economic growth over debt reduction, adding his government believes Europe needs to integrate further to overcome its current crisis.

Enrico Letta chose Germany for his first official trip abroad -- arriving there only hours after winning the final vote of approval by the Senate in Rome -- to persuade European leaders to ease the pressure on his country to pursue painful austerity measures.

"We have done everything that was necessary to keep our finances in order and we will do everything," Letta said at a joint news conference with German Chancellor Angela Merkel. "But Europe must implement policies promoting growth," he said.

Merkel has been among the strongest advocates of structural reforms, spending cuts and deficit reduction across Europe. She acknowledged that Italy has "already made substantial progress" but stressed that improving public finances and fostering economic growth must go together.

"For us in Germany, budget consolidation and growth are two elements that are not in opposition to each other but that have to develop together to foster more competitiveness and the creation of more jobs," she said. She added growth can't be fostered by governments alone but has to rely on private sector investment.

Italy, the third-largest economy in the 17-nation eurozone, has suffered years of anemic growth and is currently in recession. The unemployment rate is 11.5 percent and almost 40 percent of those younger than 25 have no job, according to EU statistics. Italy's debt burden has grown to over 120 percent of the country's annual economic output -- trailing only Greece's debt level.

Some analysts say Italy's future is the linchpin in the eurozone's hopes to survive the debt crisis. The country's economy and its debts are so large that the rest of the currency bloc could not afford to support it with bailout loans.

While Letta reiterated that his government will respect Italy's commitments to bring its public finances in order, he hinted that Europe spends too much energy obsessing over deficits and does too little to foster growth.

"We don't want a Europe that allows everyone to run the deficits that he wants. We want a Europe that uses the determination with which it has built the rules to avoid (overly high) deficits to implement policies fostering growth," he said.

Once an economy is in recession, its debt load -- measured relative to its annual economic output -- worsens. EU policies then require member nations with already excessive debt levels to make further budget cuts, which can in turn deepen the recession.

Italy has little financial leeway as it has promised to meet EU deficit limits and is also under pressure from financial markets, where investors are worried about the country's capacity to repay its 2 trillion euro ($2.6 trillion) debt pile.

Letta's coalition has announced a costly suspension of an unpopular tax on primary residences. It also pledged not to raise the sales tax and to reduce some payroll taxes, but has yet to explain how to handle the resulting shortfalls.

The European Commission, the 27-nation bloc's executive arm, was quick on Tuesday to say the agreed debt and deficit targets for this year remain unchanged.

EU leaders have hinted, however, that they are considering granting economically struggling countries like Italy or Spain more time to meet their deficit targets in the coming years provided they press ahead with structural reforms.

Letta said his government will push for further European integration, including closer coordination of economic policies, the introduction of a full banking union and a genuine political union.

"There is still no solution for the crisis because there isn't enough Europe," he insisted.

Germany, Europe's biggest economy, has at times been holding back on European integration for fear its taxpayers' money might ultimately be needed to prop up the bloc's weaker nations.

After their news conference, Letta and Merkel were having dinner at the chancellery behind closed doors.

Berlin was a delicate first stop on Letta's quick dash across Europe since Italian newspapers and politicians -- including some now backing the coalition government -- have accused outgoing Premier Mario Monti's government of being a mere stooge to Merkel.

Letta, 46, will also take his message to Paris, where he meets Wednesday with President Francois Hollande, and then to Brussels.

The center-left premier leads a still to be tested grand coalition that includes former premier Silvio Berlusconi's conservatives.

"Italy still faces a significant risk from the potential fragility of the new coalition government and its temporary stability being endangered by conflict between its various factions," said IHS Insight analyst Raj Badiani.

Already, one key proposal -- to put on hold a tax on primary residences -- was being picked apart by some of Letta's key partners.

Berlusconi said he will support the government only if the tax is repealed outright. But Italy's three main unions balked at an across-the-board abolishment of the tax, saying the money is needed for welfare programs. They argue it should be abolished only for Italians with one residence.

The tax on first homes generates 4 billion euros ($5.2 billion) a year, and the decision to suspend June payments will cost the state 2 billion euros at a time when the government urgently needs to find money to pay for a fund for workers on temporary layoffs.

[Associated Press; By JUERGEN BAETZ and KIRSTEN GRIESHABER]

Nicole Winfield in Rome and Colleen Barry in Milan contributed to this story.

Follow Juergen Baetz on Twitter at http://twitter.com/jbaetz.

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