European Commission President Jose Manuel Barroso has appealed to EU leaders not to give in to populism after Italian voters roundly rejected the austerity policies pursued by outgoing prime minister Mario Monti.
Speaking at a Reuters summit in Brussels on the future of the euro zone, Barroso said efforts to revive Europe's economy would take time and required determination. The fact that Italian voters had turned Monti out of office did not mean his policies, or those advocated by the European Union, were wrong.
"The question we have to ask ourselves is the following: should we determine our policy, our economic policy, by short-term electoral considerations or by what has to be done to put Europe back on the path to sustainable growth? For me the answer is clear."
Monti won just 10% of the vote in the Sunday-Monday poll, with Italians overwhelmingly backing the movements of former prime minister Silvio Berlusconi and comedian campaigner Beppe Grillo, both of whom reject EU-backed austerity.
Financial markets reacted with alarm. Yields on Italian 10-year government bonds, which reflect the degree of risk investors attach to the country, rose sharply and share prices in Milan tumbled.
The result leaves the euro zone's third largest economy facing an extended period of political uncertainty, with the prospect of another round of elections if a government cannot be formed.
WAKE-UP CALL
Barroso said it was incumbent on all EU and euro zone countries, especially those receiving aid from the bloc's rescue funds, to retool their economies and cut deficits in an effort to improve competitiveness and stimulate growth.
Such a prescription had worked for Latvia and was showing results in Portugal, Ireland, Spain and Greece, he said, with current account deficits narrowing, unit labour costs falling and exports beginning to pick up.
While the demands of austerity programmes, including deep spending cuts and changes to pensions and labour markets, were harsh and unpalatable to many, they were necessary, he said.
"It is true that the economic policy that we are implementing in the EU because of the financial crisis is a real challenge for political leadership," Barroso acknowledged.
But he said the Commission would not be rigid when it comes to targets, providing extra room to meet deficit goals where necessary, as has already happened with Greece, Portugal and Spain and may be required for France.
"We have to have a mix of policies that keep the root of fiscal consolidation and at the same time promote growth," he said. "Growth is the answer and growth is the goal."
Germany, as the bloc's largest economy, had a particular leadership role to play and should open up its service sector more significantly, work to increase female participation in the workforce and allow wages to rise with productivity.
Despite the turmoil that has shaken confidence in Europe's single currency project over the past three years and called into question its survival, Barroso said the forces of integration remained far greater than those pulling it apart.
During more than 25 crisis summits since the crisis exploded in Greece in late 2009, EU leaders had not taken a single decision that supported less integration, he said, even if there were deep disagreements among leaders on several issues.
