Italy should reassure markets that its economic reforms will not be reversed after Silvio Berlusconi's PDL party withdrew support for the government, OECD chief economist Pier Carlo Padoan said on Friday (7 December).
"The Italian economy is certainly weak, the timeframe for emerging from recession is getting longer," Padoan told the Corriere della Sera newspaper.
"Given there is this fragility, the main parties should give clear signals that the agenda of the Monti government will continue."
Berlusconi's party withdrew its support for Prime Minister Mario Monti yesterday (6 December), raising the risk of a snap election, but President Giorgio Napolitano said he would work to avoid a crisis and there was no need for alarm.
Centre-left leader PD leader Pier Luigi Bersani admitted that Monti’s government is on the verge of a breakup after Berlusconi’s actions, which he called completely irresponsible, Italian daily L’Unità reports.
Napolitano has the power to dissolve parliament and call new elections. If early elections come, they would take place in February instead of May.
Padoan said the widening of the spread between Italian government bond yields and German yields, after Berlusconi's People of Freedom party abstained in two confidence votes, showed the risk Italy faced.
The standoff in parliament a few months before elections are due has increased speculation that Monti's government could fall early although the practical effect may be limited given that the vote was in any case expected by March.
The yield spread had come down in recent weeks on a European Central Bank promise to buy the bonds of heavily indebted euro zone countries that ask for financial aid, falling below 300 basis points earlier this week.
"As soon as there was renewed instability, the markets get nervous again. It says a lot about the fragility of the situation," the Organisation for Economic Cooperation and Development economist said.
Today the spread between 10 year Italian BTPs and equivalent lower-risk Bunds stood at 325 basis points, while the 10 year Italian yield stood at 4.5 percent.