Italy Moves to Bridge Europe’s Divide

Mario Monti has taken a step towards bridging Europe’s north-south divide over how to support the euro zone’s weaker economies by finding common ground with Finland over the need for concerted intervention to reduce excessively high borrowing costs.

Mario Monti
Alessia Pierdomenico | Bloomberg | Getty Images
Mario Monti

Speaking at a joint press conference in Helsinki, Jyrki Katainen, Finnish prime minister, said markets were acting irrationally and had not recognized the value of Italy’s reforms implemented by its technocrat prime minister.

Finland was Mr. Monti’s second stop of a diplomatic push that began in France and ends in Spain on Thursday. Helsinki was arguably his most important objective in terms of winning support for using the euro zone’s rescue funds—possibly backed by the European Central Bank —to intervene on bond markets where Italy is borrowing at rates seen as unsustainable in the long run.

“Italy is in a comfortable position in terms of public finances,” Mr. Monti said, noting that its projected budget deficit this year of 2 percent would be half the euro zone average. But he added: “It is in a very uncomfortable position regarding unrealistically high [bond yield] spreads.”

Mr. Monti said he believed that the euro zone’s ESM rescue fund, yet to be put in place, would be granted a banking license eventually to give it more firepower, a position that clearly puts him at odds with Germany.

Mr. Katainen said a “dual track” approach was needed of countries pursuing reforms in parallel with concerted European action on interest rates, although he did not elaborate on what kind of intervention Finland might support and made no mention of an ESM banking licence.

Nonetheless, aides said the two prime ministers, who clearly enjoyed their encounter, had a very positive meeting and that Finland was ready to discuss all options, recognizing that the interest rates it was paying were unrealistically low.

“You are Mr. Single Market for us,” Mr. Katainen said, praising Mr. Monti’s earlier life as European competition commissioner and endorsing his current reform efforts.

Finnish officials have previously spoken of the political hurdles in persuading Finns to put up more money for Europe’s bailout mechanisms, and how using the ESM to intervene on open markets would be unlikely to succeed. Targeted intervention at bond auctions is seen as a possible option, however.

Neither prime minister was ready to say what action the ECB should take at its monthly governing council meeting on Thursday, although Mr. Monti made a point of praising Mario Draghi, ECB president, for his comments last week on the obstacles to a euro zone solution posed by excessively high bond rates.