Italy seeks pro-growth alliance with Spain

MILAN — Italian Premier Enrico Letta will seek support on yesterday from his Spanish counterpart, Mariano Rajoy, in his quest to have Europe focus more on economic growth instead of just debt reduction.

Since coming to office eight days ago, Letta has been on a whirlwind tour of Europe to meet with the region's top leaders and lay out his desire to ease the impact of austerity measures on the economy.

A campaign of sharp spending cuts and tax increases has reduced deficits, but it has also pushed the 17-country eurozone into a deep recession. Financially weaker countries like Italy and Spain are not expected to recover before next year and unemployment is at record highs, particularly among the young.

Ahead of his meeting with Rajoy, Letta called Spain an "ally to make Europe the continent that places more attention on growth and social discomfort."

Still, he acknowledged that Italy cannot return to its old ways of accumulating debt. Italy's debt is the second-highest in the eurozone after Greece, at 127 percent of annual GDP.

Letta did not specify how his government would create growth without adding to debt.

His government has so far frozen a tax on first homes, scrapping a June payment while ministers consider alternative policies. The EU has warned Letta's government that if it cancels the tax entirely, it would have to find 4 billion euros ($5.2 billion) in new revenue elsewhere.

New economic figures released yesterday underscored the heavy task awaiting Letta and his ministers.

The national statistics agency forecast that Italy's economy will shrink 1.4 percent this year as household spending and corporate investments both decline, before rising a slight 0.7 percent in 2014. By comparison, the Organization for Economic Cooperation and Development — a global watchdog — forecasts of a 1.5 percent contraction this year and 0.5 percent growth in 2014.

The head of Italy's market regulator noted that Italians had reduced their savings over the last 20 years from 22 percent of disposable income to 8 percent. That is eroding potential investments to spur growth and reduce youth unemployment.

"Austerity without hope can become a detonator of a generational crisis," Consob President Giuseppe Vega told an annual meeting at Milan's Stock Exchange.

In the debate over austerity, the two main forces arguing in favor of continued debt reduction have been Germany and the European Central Bank.

On yesterday, ECB President Mario Draghi repeated that without sustainable public debts, a country cannot enjoy economic growth. He admitted that austerity's short-term impact on economic growth can be a problem. But he said that could be addressed in part by choosing the right mix of austerity policies.

"To mitigate the inevitable recessionary effects of fiscal consolidation, the composition of such measures must favor the reduction of current public spending and of taxes," Mario Draghi said in a speech in Rome, noting that taxes are relatively high across Europe.

Many governments have both cut spending and raised taxes.

Draghi also insisted that governments should continue to pursue structural reforms, such as making the labor market more flexible.