Italy eyes unity cabinet as EU dithers on crisis

Thu Nov 10, 2011 9:36am EST
 
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By Paolo Biondi and Lefteris Papadimas

ROME/ATHENS (Reuters) - Italy moved closer to a national unity government on Thursday, following Greece's lead in seeking a respected veteran European technocrat to pilot painful economic reforms in an effort to avert a euro zone bond market meltdown.

After four days of chaotic haggling, former European Central Bank vice-president Lucas Papademos was appointed to head an interim crisis cabinet charged with saving Greece from default, bankruptcy and an exit from the euro zone.

In Rome, former European Commissioner Mario Monti emerged as favorite to replace Italian Prime Minister Silvio Berlusconi within days and lead an emergency government that would implement long delayed reforms of pensions, labor markets and business regulation.

Political and economic turmoil in Italy has spurred fears of a possible break-up of the euro zone with borrowing costs for Europe's third biggest economy at unsustainable levels and the 17-nation currency bloc unable to afford a bailout.

German Chancellor Angela Merkel, Europe's main paymaster, called for broad political support for reforms in Greece and said she believed Italy was winning back confidence, but political clarity was still needed in Rome.

She rejected talk of a possible shrinking of the currency area, saying: "We only have one goal, that is to bring about a stabilization of the euro zone in its current form."

European Union officials continued to dither and pass the buck on how best to fight the worsening sovereign debt crisis.

Three senior ECB policymakers rebuffed pressure from investors and foreign governments to intervene massively as a lender of last resort on bond markets to shield Italy and Spain from rapidly spreading financial contagion.   Continued...