Italy closely watched by investors, ECB's Visco warns

The country's looming election has become a growing source of concern for financial markets.

Italy's ability to shore up its strained public finances is being closely monitored by investors, a member of the European Central Bank governing council has warned, amid growing nervousness about the outcome of the country's looming general election.

Ignazio Visco, the governor of the Bank of Italy, cautioned that the country "must not lower its guard" as it attempts to bolster its weakened economy.

"The attention of international investors continues to focus, rightly, on our capacity to preserve balance in public finances and to pursue with determination, an increase in our development potential," Mr Visco is reported to have said.

The warning comes after stock markets took fright earlier this week at signs of mounting political instability in Europe.

The growing popularity of former Italian prime minister Silvio Berlusconi in polls ahead of the February 24 election has been one source of concern for investors, with Mr Berlusconi garnering support in Italy by pledging to tear-up “German-imposed” austerity policies and cancel an unpopular property tax. Corruption allegations that have rocked the Spanish government have also unnerved traders.

Olli Rehn, the European Union's economic and monetary affairs commissioner, today warned that recession-hit Italy must continue to implement economic reforms once the election is decided.

"It's a very fragile situation. Whatever colour the new government in Italy has, it is important that it maintains the course of reform," he told Austria's Profil magazine.

Mr Rehn also cautioned that the growing strength of the euro will hurt countries in southern Europe by causing "problems with their exports to other parts of the world".

Germany and France have clashed over whether EU officials should intervene in currency markets, and Mr Rehn today argued that countries around the world should work more closely together to offset the potential damage caused by currency fluctuations.

"I recognise the risk of competitive devaluation. We have recently warned the government of Japan about corresponding steps towards depreciation of the yen," he said.

"We need reforms in the international monetary system so as to avoid negative influences on international trade. The coordination within the G7, G20 or the IMF should therefore be improved," Mr Rehn added.