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ECB's Praet: Italy's Turning Point Still Very Fragile

The Italian economy may be exiting recession signaled by a strong turnaround in confidence indicators, but downside risks remain, European Central Bank Executive Board member Peter Praet said on Sunday.

"The turning point is still very fragile, we are only at the beginning of this," Praet said in a interview to the Italian daily La Stampa. "That's why we always say that there are downside risks, especially if structural reforms are stopped."

Businesses see the situation improving, but feel it is still not sufficient to start investing, Praet noted. He expects investment to start recovering in 2014.

"In that recovery phase, the ECB will be very attentive, and if there will be credit supply constraints holding back the recovery momentum, we will be ready to act," the policymaker said.

Discussion regarding a country exiting euro does not reflect the reality that the euro is an irreversible project, Praet said.

"Those dreaming of the world before the euro, tend to forget what it really was, before," he said. The ECB member drew attention to high inflation, currency devaluations, volatile exchange rate, double-digit nominal interest rates that Italy experienced in before adopting the euro.

Praet urged Italians to learn from the lessons of history and said, "Monetary solutions are never the real solutions".

Further, he said it was essential that the Italian government sticks to its fiscal commitments so as to keep public debt on a sustainable path and there was no scope for relaxing fiscal efforts. The country's public debt level is on a better medium term trajectory now, the central banker noted.

On the fiscal consolidation front, Italy now needs to shift focus from tax hikes and start cutting expenditure. The appointment of former International Monetary Fund budget expert Carlo Cottarelli to review the government spending is a positive move in this direction, Praet said.

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