Italy risks economic 'vicious circle'

Unemployment woes continue in Italy
Unemployment woes continue in Italy

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Unemployment woes continue in Italy 02:52

Story highlights

  • Bank chief: Italy's economy risks a "vicious circle" of weak growth and lack of confidence
  • Warning comes as unemployment rose to its highest level for 13 years

Italy's economy risks a "vicious circle" of weak growth and lack of confidence, the governor of the Bank of Italy has warned as unemployment rose to its highest level for 13 years while its recession deepened.

More than 35 per cent of young Italians are out of work as factory closures, bankruptcies and public sector cuts fuel a nationwide backlash against the austerity policies of Mario Monti's technocrat government ahead of general elections early next year.

Speaking at a banking conference in Rome, Ignazio Visco, central bank governor, praised Mr Monti's structural reforms for having "stopped the loss" of market confidence in Italy. With an eye to whoever forms the next government, he said budget targets must be respected and reforms implemented.

Nonetheless, Mr Visco warned of difficult times ahead, with reforms only having an impact in the "medium term" and the government planning further austerity measures to finance a public debt of €2tn -- or 126 per cent, second only to Greece in the eurozone as a percentage of economic output.

"There is the risk of a vicious circle -- little growth and falling savings, families feel uncertain and growth drags further," Mr Visco said.

Berlusconi sentenced, blames politics
Berlusconi

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Berlusconi sentenced, blames politics 02:23
Learning with less in Italy
Learning with less in Italy

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Learning with less in Italy 03:13
Visco hopeful about the eurozone
Visco hopeful about the eurozone

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Visco hopeful about the eurozone 03:34

Italy fell back into recession in the second half of 2011; the government forecasts the economy will contract 2.4 per cent this year and 0.2 per cent in 2013.

The latest figures show unemployment jumped to its highest since 1999, reaching 10.8 per cent in September, up from 10.6 per cent in August.

High jobless levels in Sicily, nearly double the national average, were seen as a significant factor behind the low turnout in regional elections last weekend, driving a surge in support for the anti-establishment Five Star Movement, which is opposed to Mr Monti's austerity programme and, according to opinion polls, is emerging as the second most popular party nationwide behind the centre-left Democrats.

Expressing the fears of foreign investors over the prevailing political uncertainty in Italy, Giuseppe Mussari, president of ABI, the national banking association, urged politicians contesting the next elections to "remove doubts with regards to their firm adhesion to the public finance targets established by the European Union and to the policies pursued by the Monti government".

His remarks were apparently aimed at Silvio Berlusconi, former prime minister and leader of the main centre-right party People of Liberty, who attacked Mr Monti's economic policies at the weekend and said his party should reconsider its support for the unelected government.

Pierluigi Bersani, leader of the centre-left Democratic party, has suggested the next government should renegotiate Italy's 2013 budget deficit target, which was imposed by the European Central Bank and the Bank of Italy on Mr Berlusconi's previous government before its collapse last November.

The Italian economy would start growing again in the second quarter of 2013, Vittorio Grilli, finance minister, told a television interviewer on Wednesday. However, many analysts are less optimistic, seeing growth only returning later in the year.