Debt fright

Silvio Berlusconi has been uncharacteristically silent in recent days, as fears grow about the ability of the Italian economy to withstand financial pressures. But on Wednesday evening, in a carefully-timed address to parliament following the close of markets, Berlusconi broke that silence.

"The country is economically and financially solid," Berlusconi told parliamentarians. "In tough moments, it knows how to stay together and confront the difficulties ... The government and parliament will act, I hope, with a large political and social consensus to fight every threat to our financial stability."

DW's Rome Correspondent, David Willey, said Berlusconi had painted an "extremely optimistic" picture of the Italian economy.

Indeed, Berlusconi sought to reassure markets that Italy has the solid foundation needed to stabilize its debt. He said his government was willing to take the necessary steps to achieve growth.

Concern in Brussels

Berlusconi's attempts at restoring confidence followed a day of drama on financial markets, as Italian and Spanish bonds reached 14-year highs. In early trading on Wednesday, the yield on Italian ten-year bonds rose 0.19 percentage points to 6.21 percent. A cost of borrowing above six percent is considered unsustainable by many economists.

Earlier, European Commission President Jose Manuel Barroso said this surge was cause for deep concern, although it did not reflect the true state of affairs.

"In fact, the tensions on bond markets reflect a growing concern among investors about the systemic capacity of the euro area to respond to the evolving crisis," Barroso said.

Blame game

In response to Berlusconi's parliamentary address, the head of the main opposition Democratic Party, Pier Luigi Bersani, said the prime minister had failed to come up with a concrete agenda to tackle the country's financial woes, and called on him to resign.

Stefan Collignon, Professor of Political Economy in Pisa, also said he blamed much of the uncertainty on financial markets on Berlusconi himself.

"The bottom line is that Italy will need a new prime minister and a new government that would give more confidence in the financial markets and in the political establishment across the European Union," Collignon told Deutsche Welle.

'Fruitful' talks

Earlier on Wednesday, Italian Finance Minister Giulio Tremonti held two hours of emergency talks with Luxembourg Prime Minister and eurozone chief Jean-Claude Juncker, saying the two had had a "long and fruitful discussion."

Juncker, for his part, revealed little about the talks aimed at preventing Italy from heading down the path of bailed-out eurozone countries Greece, Ireland and Portugal.

"We had a long discussion visiting all the problems the euro-area is facing," Juncker told reporters, adding, "We will continue our mediation in calm."

New alarm?

Less than two weeks after leaders of the 17-nation euro currency bloc agreed on a second bailout for Greece, the economies of Spain and Italy have raised fresh concern for the euro's survival.

"The whole of Europe is in a very dangerous situation," Finnish Prime Minsiter Jyrki Katainen told public broadcaster YLE.

However, German Economics Minister Philipp Rösler was less alarmed, saying Italy and Spain had not even been discussed at Berlin's weekly cabinet meeting on Wednesday.

With many eurozone leaders on holiday - including German Chancellor Angela Merkel - it seemed unlikely that there would be a quick reaction from eurozone governments. The Spanish government did say on Tuesday that the main eurozone countries had been in telephone contact with one another.

It also seems that, for the time being, the conditions are not in place which would allow action to be taken. The eurozone's rescue fund cannot give precautionary credit lines to EU member states until its new powers are approved in September at the earliest.

The European Central Bank meanwhile looks unlikely to reactivate its bond-buying plan, which temporarily stabilized markets last year, and, given Italy and Spain's current situations, the countries would have difficulty passing new austerity measures to assuage markets; Rome just recently adopted a 43 billion euro (62 billion dollars) savings package, and the government in Madrid has just called an early general election for November 20.

Author: David Levitz, Joanna Impey
Editor: Michael Lawton