“The wide-ranging consolidation and reform agenda of the Italian government are impressive… and I am personally convinced that these reform efforts will bear fruit,” Merkel said after talks with Italian Prime Minister Mario Monti.
“I think we need to continue along this path together,” added Merkel.
Monti is battling to drive down the debt of the eurozone’s third largest economy with a series of austerity packages and tax hikes, as well as spur future growth with a raft of reforms.
“Markets are in the process of recognising the successes,” Monti said, noting that earlier on Wednesday Italy had raised €9.0 billion in six-month debt at sharply lower rates.
Merkel also described the successful bond auction as “hopeful.”
Asked whether they had discussed the possibility of Italy applying for a sovereign bailout, Merkel said that “nothing concrete” had been put on the table.
“We discussed the fact that the ECB is preparing decisions. We know our funds, the EFSF and the ESM, and feel well equipped politically,” said Merkel, referring to the EU’s two bailout pots.
However, the two appeared to clash on the idea of giving the European Stability Mechanism, the future bailout fund worth €500 billion, a banking licence to let it borrow directly from the ECB, giving it unlimited firepower.
Merkel quoted ECB President Mario Draghi as saying that such a banking licence “was not compatible with the EU treaties” and added: “That is also my conviction.”
Monti said a banking licence was “conceivable” but as part of a wider package of measures and in a longer-term perspective.
“We know that we have not completed our stabilisation but we have achieved a lot in a short time — more than we had achieved in several years in eurozone integration,” said Merkel.