ROME/ATHENS (Reuters) - Italy’s Senate is set to vote on austerity measures demanded by the European Union to avert a euro zone meltdown, after U.S. President Barack Obama ratcheted up pressure for more dramatic action from the currency bloc.
Obama spoke with German Chancellor Angela Merkel and French President Nicolas Sarkozy late on Thursday and also called Italian President Giorgio Napolitano.
A German government official said there was an “exchange of opinions,” while Treasury Secretary Timothy Geithner demanded fast action from Europe.
“The crisis in Europe remains the central challenge to global growth. It is crucial that Europe move quickly to put in place a strong plan to restore financial stability,” Geithner said in a statement following a meeting with finance ministers from the Asia Pacific Economic Cooperation countries.
After months of dither and delay, Rome appears to have got the message after bond markets pushed it to the brink of a bailout the euro zone cannot afford to give.
The Italian upper house is due to vote on a package of cuts later in the day. The law should pass easily, as it should in the lower house on Saturday.
Voting for the first time in the Senate will be Mario Monti, the former European Commissioner who has emerged as favorite to replace Silvio Berlusconi as prime minister. Fellow technocrat and former European Central Bank policymaker Lucas Papademos will head a new unity government in Greece.
Berlusconi, who lost his majority in a vote on Tuesday, has promised to resign after the financial stability law is passed by both houses of parliament.
If the votes pass smoothly, Napolitano may accept his resignation as early as Saturday night and formally mandate Monti to try to form a new government soon afterwards.
Berlusconi had insisted early elections were the only option. But he has since softened his stance. Markets were calmed by the prospect of an interim government, rather than a three-month vacuum before elections are held.
Monti, a highly respected international figure, has been pushed for weeks as the most suitable figure to lead a national unity government to push through painful austerity measures.
The euro held steady above its recent one-month low but investors were skeptical it would climb far, given that even a technocrat Italian government might struggle to make progress on long-promised, never-delivered fiscal reforms.
The premium demanded to hold Italian, Spanish and French government bonds over German benchmarks fell a little.
“Given how far we have widened out in some of these peripherals, we can have maybe two or three days of calm — in inverted commas — but nothing has really changed underneath,” one bond trader said.
Spain, which holds elections in nine days’ time, stopped growing in the third quarter, calling into question its ability to meet deficit reduction targets for 2011 and pushing the euro zone’s fourth largest economy to the brink of recession.
With European leaders dithering over how to tackle the deepening crisis, pressure has mounted on the European Central Bank to act more forcefully — becoming a full lender of last resort as the Federal Reserve and Bank of England are.
Three senior ECB policymakers on Thursday rebuffed arm-twisting from investors and world leaders to intervene massively on bond markets to shield Italy and Spain from financial contagion.
Germany’s Vice-Chancellor Philipp Roesler said on Friday the ECB did not have “unlimited firepower,” adding that if it opened its floodgates fully, they could never be closed again.
Germany strongly opposes the ECB taking on a broader crisis-fighting role, arguing this would compromise the independence of the bank.
The euro zone’s plan for a more powerful rescue fund may also be running into trouble.
Klaus Regling, the head of the 440 billion euro European Financial Stability Facility, was reported by the Financial Times as saying the recent market turmoil had made it more difficult to scale it up to 1 trillion euros, as planned by euro zone leaders.
Investors have fled from bonds issued by highly indebted countries. Luring them back by offering insurance on losses, the centerpiece of a plan agreed in Brussels on October 26, would now probably use up more of the fund’s resources, Regling said.
“The political turmoil that we saw in the last 10 days probably reduces the potential for leverage. It was always ambitious to have that number, but I’m not ruling it out,” the FT quoted him as saying.
In Athens, Greece’s prime minister designate was set to name a new crisis cabinet on Friday to calm the political turmoil that has threatened to bankrupt Athens and force it out of the euro zone.
Greece’s two main parties agreed on Thursday to make Papademos head of a new unity government, ending a chaotic search for a leader to save the country from default. He must now fulfill the terms of a 130 billion euro bailout plan agreed with European partners in October.
“The path will not be easy but I am convinced the problems will be resolved faster and at a smaller cost if there is unity, understanding and prudence,” Papademos said on Thursday.
He was left working alone in his new prime ministerial office on Thursday night after talks on the new government ended with no sign of an agreement.
Sources in the two parties — the ruling Socialists and the opposition New Democracy — said Evangelos Venizelos was likely to remain as finance minister when President Karolos Papoulias swears in the new cabinet, scheduled for 1200 GMT (7 a.m. ET).
Writing by Mike Peacock; Editing by Rosalind Russell