Finally, someone knocked once

Mario Monti is right to keep his feet firmly on the ground when he says that he prefers progress in the spread rather than in style. Because it is on that number (yesterday 5.17% compared with German Bunds and a BTp yield hovering on around the alarm threshold of 6.99%) that the immediate future of Italy is played out on. A match, in Europe and more importantly on markets, that remains full of suspense.

Let's be clear: yesterday Italy's prime minister obtained a result that politically was very significant, unthinkable two months ago. Angela Merkel in Berlin certified that the measures that in her first meeting with Monti had defined as "impressive" have become law and reality. She defined them as "extraordinary" progress in front of a Monti "in love" with Germany, a great supporter of the Eurosystem driven Germany and twice icy with the US (deep down they are responsible for the crisis and the outlook for the continent is not of a "United States of Europe").

Summing up, Italy did well, and very quickly, its part. It turned over a new leaf with its "strange" Government of national commitments (Monti's copyright) and it is getting ready in a few days time to turn over a brand new leaf with the labor market reform and with a blunt blow (from gas to taxis, from the Postal system to the Railways, from banks to professions) aimed at opening in terms of competitiveness a system that is jammed and unable to grow.

However, more importantly, chancellor Merkel said Germany would proceed on the road to strengthen the bailout fund and that the European Central Bank will be able to contribute to it. It was one of the main demands of the Italian Government (along with a softer and more sustainable landing for the debt reduction plan, which is also being redrafted) in order to stabilize the continental framework and to place on the table an effective protection network. The fact that Berlin, whose GDP grew 3% in 2011 and that has a deficit/GDP ratio of 1.1% (it was 4.3% at the end of 2010), expressed itself clearly on this sensitive point having behind it a public opinion which is definitely reluctant on paying other people's debts, is a point in favor of Rome and of the accurate diplomatic "weaving" that Monti undertook in the past few weeks.

There is the clear impression, in fact, that after much vacillation (maybe also following the German slowdown in the last quarter) the Merkel-Monti meeting in Berlin paved the way for a new European pact to favor growth.
For Europe this would mean an exceptionally significant turning point, going beyond Italy's new re-found credibility. Monti was able to say that our Country is no longer a "source of infection" for Europe but it is an integral part, along with Germany and France, of the engine of growth. Precisely Germany, France and Italy in the three way summit on January 20th in Rome could seal this new prospect ahead of the final drafting of the new "fiscal pact" that will come into force by March 1st.
Naturally miracles do not come cheap. The strengthened bailout fund needs to become operational as fast as possible. Even Monti warned that it will take "many quarters" in order to see results in terms of growth and employment. But markets speak English more than German, French and Italian and they want facts.

On the dangerous ground of interest rates, the turning point still has to come: an agitated picture, where Italy (today the three month and one year BoT auction, tomorrow the three-year BTp bond auction) is under close surveillance. Again yesterday ratings agency Fitch asked the ECB to support Italy in order to avoid a "catastrophic" collapse of the euro. Rome in 2012 has to place some 440 billion euro of which 143 by the end of March, according to Goldman Sachs estimates. Important amounts that indicate how difficult "sustainable" debt refinancing is with a BTp-Bund spread at 520 basis points and how, in Rome, political forces supporting the Government and social parties are called to show, together, both new responsibility and boldness.

(translated by Yael Schrage)

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