ECB chief Trichet warns Italy to stick with austerity

Italy has received a stern warning from the head of the European Central Bank to stick to its austerity plan after it failed to pass key measures.Jean-Claude Trichet told a forum in northern Italy that sticking to the plan was “absolutely decisive” to Italy’s credit worthiness.Italy faces a debt mountain of 1.9 trillion euros (£1.7tn; $2.7tn).But Prime Minister Silvio Berlusconi, beset by personal scandals, has failed to pass clear measures.The ECB has been buying Italy’s bonds in the market to try to hold down yields and stop its borrowing costs spiralling out of control.

There has been some speculation that it may reduce its purchases to put pressure on Rome to act more quickly to pass a much disputed 45.5bn euro package of austerity measures now going through parliament.However, any sign of the ECB cutting back its bond-buying programme would risk triggering a market sell-off that could tip the eurozone’s third economy into a Greek-style emergency, Reuters news agency reports.Mr Trichet declined to discuss the ECB’s bond-buying plans at Saturday’s conference, in Cernobbio on northern Italy’s Lake Como, but was quoted by Reuters as saying the ECB would discuss it at a meeting next week.

He urged Italy to push through the package of cuts announced in early August, saying: “It is essential that the target which was announced to diminish the deficit will be fully confirmed and implemented.”He described as “extremely important” all measures to improve the “flexibility” of Italy’s economy.Both industrialists and union leaders have accused the austerity plan of relying too much on spending cuts and new taxes, and offering little to stimulate growth or to encourage job creation.Disagreements over taxes and pensions within Mr Berlusconi’s coalition government led to a series of U-turns over the past week.A tax on high earners and a rise in the pension age were proposed, then dropped, within days.New doubts about the ability of Mr Berlusconi to focus on the austerity plan were raised when magistrates arrested a businessman linked to a 2009 prostitution scandal on suspicion of trying to extort as much as 0.5m euros from the prime minister. – BBC