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Bank of Italy chief urges structural reform

PALERMO (Italy): Bank of Italy Governor Antonio Fazio appealed for faster moves on labour market flexibility and tax reduction, saying structural reform was the only way to turn economic recovery into lasting growth.

"It is up to policymakers and the social partners to promote the most favourable conditions for the nation's economic and social development," he said in a speech to the annual Forex conference of foreign exchange dealers.

"It is necessary to enact structural reforms that will curb inflation and foster growth in order to turn the recovery that is under way into the start of a new era of growth."

If Italy did not move quickly to enact structural reforms, it would find itself increasingly disadvantaged in competition with European and U.S. firms, Fazio said.

Noting that the 40 percent rise in share prices in Europe in 1999 becomes smaller when converted into dollars because of the U.S. currency's appreciation, he warned that European firms were at risk of becoming takeover targets.

"In a period of robust growth in mergers and acquisitions, European firms are at a disadvantage in terms of valuations and more easily taken over," he said.

Fazio said the decline in the euro had not had seriously inflationary consequences and had been of limited benefit for cyclical recovery in a largely self-contained trade area.

But an analysis of possible developments in global finance showed significant risks for exchange rates and interest rates.

The single currency had contributed to the stability of the international financial system, but increased competition from globalisation made it more urgent for each country to strive for enhanced competitiveness, Fazio said.

"We had long warned that participation in monetary union would have exposed the weaknesses in the Italian economy.

"Imbalances that were previously expressed in higher interest rates and, in extreme cases, exchange rate difficulties are now directly reflected in investment, production and employment," he told the conference.

He identified those weaknesses as "an inconsistency between labour costs and economic viability" and a too-high tax burden.

Banks and private businesses must do their part too, he said. The banking system had made progress in consolidation but must still act resolutely to improve efficiency and reduce unit labour costs.

Fazio urged businesses to grab the opportunities offered by the growing application of information technology.-Reuters