Europe Economy

Will Italy Waste ECB Breathing Space?

Reported by Julia Chatterley, Written by Patrick Allen
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Adam Jeffery | CNBC

The sting has been taken out of the euro-zone debt crisis by huge amounts of unconventional policy support by the European Central Bank but a debate is still raging about what euro-zone governments are doing with the time afforded them by ECB President Mario Draghi's "whatever it takes" support of the euro.

Take Italy, Mario Draghi's own country, which has recently formed a grand coalition following inconclusive elections earlier this year. With a debt-to-GDP ratio of well over 100 percent, Italy is widely regarded as a euro-zone member that needs to push through aggressive structural reforms in order to regain its competitiveness within the euro zone and beyond.

"Thanks to the kinds of policies we have followed in the last few years, we have already gained some room for maneuver within the 3-percent target," Italy's new finance minister, Fabrizio Saccomanni, said in an interview with CNBC on Saturday on the sidelines of a meeting of G7 finance ministers and central bankers in Aylesbury, England.

Three percent of GDP is the target for euro-zone members to achieve on the size of their annual deficits. The European Commission has already allowed some members to slow the pace of reaching this target to help boost growth, though not everyone agrees that Italy has time on its side to address its debt levels.

Speaking in Italy over the weekend, veteran hedge fund manager George Soros warned Italy that the current calm won't last.

The recovery "will not last long. We are in a situation that is far from being in balance," Soros said in a speech reported by Italian daily La Stampa.

Soros said Italy is "no longer master of its own destiny" and is dependent on credible coordinated action by the European Union.

Soros has long called for the introduction of eurobonds and great fiscal union, something Berlin has long opposed.

"The evidence is growing that austerity policies do not work. Sooner or later, I expect the tendency to turn. The sooner it happens, the better," Soros said.

Anyone hoping for Italy's new government to take significant action on structural, long-term reforms should take note of the Italian governments view of its own policy agenda.

"We don't have a very long-term agenda. The result of the election has produced a fragmented parliament. There is a strong coalition that supports the government, but also the possibility that we will have new elections in a year and a half or two years," Saccomanni said.

"We are trying to operate within that time frame. Not just the five-year year normal length of the legislature."

Jeroen Dijsselbloem, Dutch finance minister and chair of the euro group of finance ministers, wants other governments to focus on reform and not rely on the ECB's unconventional policy.

"Monetary policy can really not help us out of the crisis. It can take away the pressure, it can accommodate new growth. But what we really need in all countries is structural reforms in the first place." Dijsselbloem said in an exclusive interview with CNBC.

"I'd just like to stress the point that in the policy mix of fiscal policy, monetary policy and structural reforms – I'd like the order to be exactly the other way around." said Dijsselbloem.

(Read More: Eurogroup Chief: France Must Speed Up Reforms)

Saccomanni told CNBC he is working on ways to boost credit to Italian businesses, many of which are failing amid years of recession in the country.

"There is also room through for fiscal actions. Trying to reduce taxes on small enterprises in return for their hiring of young people. Or in support of investment in new technologies, innovation etc. This is the whole area of the reform program in the field of jobs which has many facets," Saccomanni said.

Ignazio Visco, the governor of the Bank of Italy who succeeded Draghi when Draghi got the top job at the ECB, thinks the central bank is in a place to offer further support to Italy and the rest of the euro zone if required, including a highly controversial cut in the deposit rate.

''We think that and I personally think that this is effective the economy now is capable of taking it on board. Technically we are equipped and ready to intervene. There may be unintended consequences. We know we may have to work on that and we know how to work on that."

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