Italy's economy will shrink by around two per cent this year, the head of the Italian central bank said Sunday, as he called for adopting a "new Italian spirit" to tackle the eurozone debt crisis.

"Consensus forecasts indicate the GDP (gross domestic product) will shrink around 2.0 per cent," Ignazio Visco said in an interview with the Corriere della Sera, revising down an earlier forecast.

At the end of May, Visco said the contraction could be kept to around 1.5 per cent.

"2012 will be negative, but if the situation does not get worse, if the risk on interest rates drops, if the crisis solution is shared on a European level, we could see light at the end of the tunnel by the end of the year," he said.

Prime Minister Mario Monti used a June 28-29 crisis-busting summit to step up pressure on his proposal for a defence against high borrowing costs.

But while the markets were temporarily calmed by the talks, the rates demanded by investors to buy Italian debt are rising again.

Like Monti, Visco said Rome was being unfairly punished by the markets.

"Two fifths of the 470 base points difference between BTP (Italian bonds) and (the benchmark German) Bund are our 'fault'; because of our public debt, our lack of competitivity, our low potential for growth," Visco said.

"The rest is the risk recognition the Italian state pays for investor fears that at a certain point the single (euro) currency will be no more," he said.

Italy, which entered into recession at the end of 2011, saw its GDP contract by 0.8 per cent in the first quarter of 2012, following a series of harsh austerity measures aimed at saving the country from the eurozone debt crisis.

The head of the Bank of Italy praised Monti for the reforms carried out so far but called for "an increase in investments in this country, which is weighed down by corruption and dishonesty."

"Believe me, the money can be found," he said, particularly if Italy's small and medium enterprises are given assistance in applying for European funds.

Italy would do well to set up a system "to help resolve administrative, legal, tax problems and give guarantees to single businessmen, rather than the multinationals, against bureaucracy and corruption," he added.

Monti, who heads up a technical government which came to power last November amid the debt crisis, is due to step aside in April when Italy will go to the polls. He has said he will not run for election.

Visco said he could not predict what would happen when Monti steps down, but called on Italy's political parties to "show their ambition to draw up growth plans, and not just for the economy. A new Italian spirit is needed," he said.

As eurozone finance ministers prepare to meet Monday to build on measures agreed at last month's summit, Visco said the key is financial integration.

"The eurozone's financial system is fragmented, and the single currency cannot be successful like this," he said.

channelnewsasia.com