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Italy Warned of 'Sudden Changes' in Market Sentiment

Rome, Italy
Magdalena Jankowska | E+ | Getty Images
Rome, Italy

Italy might be making friends around Europe for its anti-austerity stance, but the Organisation for Economic Cooperation and Development (OECD) warned that the country must stick to implementing spending cuts.

In its annual report on Italy, the OECD appeared to tacitly warn the country's new leadership that any changes to its reform policies could damage the country's recovery.

"Italy has embarked on a wide-ranging strategy to restore fiscal sustainability and improve long-term growth... However, with the public debt-to-GDP ratio nearing 130 percent and a heavy debt redemption schedule, Italy remains exposed to sudden changes in financial market sentiment," the report published on Thursday said.

On taking office this week, Italy's new prime minister Enrico Letta said Italy would "die of fiscal consolidation alone, growth policies cannot wait any longer." He said that Italy must focus immediately on reviving its economy and would reconsider austerity measures and spending cuts while managing to bring down Italy's public deficit.

(Read More: Italy's New Government Passes First Market Test)

"Maintaining fiscal consolidation is key to putting Italy's debt-to-GDP ratio on a downward path over the medium term. Budgetary measures should concentrate on permanent spending cuts to avoid already high levels of taxation," the report stated.

The OECD praised Italy for "progress" over reforms to boost economic growth over the past 12 months – many of which were implemented by the technocrat leader Mario Monti who lost elections in February - and warned that any change of course could damage Italy's chances of recovery.

"Large and sustained reductions in public debt are therefore the top fiscal priority. The gains from recent structural reforms must also be consolidated and further measures to promote growth and improve competitiveness need to be implemented, to return Italy to healthy growth," the report continued.

(Read More: Italy Bond Yields Could Be Poised on Precipice)

Letta said on Monday that he would lobby Italy's European partners to obtain more growth-oriented policies at the EU level, a task he set to in earnest this week once his government had won a vote of confidence.

Letta visited his European counterparts in Berlin and Paris, promising Chancellor Angela Merkel, an advocate of spending cuts and deficit reduction, that Italy would stick to deficit reduction.

Meanwhile, as the anti-austerity sentiment spreads among the region's politicians, Letta's pro-growth stance is winning him allies.

On Wednesday, French President Francois Hollande said that he was "100 percent satisfied" after meeting Letta and echoed his Italian colleague's pro-growth agenda saying, "Europe has to do the maximum it can for growth."

(Read More: Is Italy's Economy Minister Draghi's Man in Rome?)

The president of the European Commission, Jose Manuel Barroso, also praised Letta on Wednesday.

"Prime Minister Letta and I share the view that the European Union…needs to implement urgently the growth and job-enhancing measures thatare indispensable," Barroso told a press conference on Wednesday.

"The country has embarked on an ambitious road. I'm sure it cannot and it will not stop here if the steep slope of mistrust,high debt and recession is to be avoided. Of course, the road is difficult, but it is the only way to get to the highway of growth and jobs," he said.

Correction: The previous image in this story was incorrectly captioned as the parliament in Rome. It was, in fact, the Victor Emmanuel II Monument in Rome.

Contact Europe: Economy

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