ROME ? Economic reforms being shepherded by Italy's new premier are "going in the right direction" but more action is needed, the EU's monetary chief said Friday, hours after Italy's borrowing rates skyrocketed during bond auctions.
Olli Rehn also told reporters after meeting Premier Mario Monti in Rome that Italy's economic fundamentals were "solid."
Many investors did not appear to agree with his sentiments, however, and Italy's soaring borrowing rates Friday temporarily battered stock markets in Europe. Investors worried whether Monti, an economist who came to power only a week ago, will succeed in bringing the eurozone's third-largest economy back from the brink of financial disaster.
Monti's medicine ? budget rigor and growth measures while fairly distributing the social pain ? are "the right ones," Rehn said. "I fully endorse them."
Economic reforms announced so far, including liberalizing professions and encouraging employers to hire and making it easier for them to transfer worker are "going in the right direction," the monetary affairs commissioner said, after a day of meetings that included talks with top economic and banking officials. "We expect that more will follow."
Specifically, Rehn said, "Italy needs a comprehensive and wide-ranging package of reforms to kick-start growth and offer young people not only more jobs but better jobs."
Against a backdrop of Europe's escalating debt crisis, Friday's dismal auction results were another sign that Monti's new technocratic government faces a battle to convince investors it has a strategy to cut down the country's euro1.9 trillion ($2.6 trillion) debt. They are also likely to fuel calls for the European Central Bank to use more firepower to cool down a rapidly escalating debt crisis.
Driving market fears is the knowledge that Italy is too big for Europe to bail out, like it has done with smaller nations Greece, Portugal and Ireland. Given the size of its debts ? Italy must refinance $300 billion next year alone ? the government has to continually tap investors for money. But when borrowing rates get too high, that can fuel a potentially devastating debt spiral which could bankrupt the country.
Friday's auctions showed that investors see Italian debt as increasingly risky. The country had to pay an average yield of 7.814 percent to raise euro2 billion ($2.7 billion) in two-year bills ? sharply higher than the 4.628 percent it paid in the previous auction in October. And even raising euro8 billion ($10.7 billion) for six months proved exorbitantly expensive, as the yield for that spiked to 6.504 percent, nearly double the 3.535 percent rate last month.
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