German Chancellor Angela Merkel said Wednesday that she had "great respect" for recent economic reforms passed by Italy's interim government, stressing to Prime Minister Mario Monti in Berlin that Rome would be "rewarded" for them as the crisis-hit country struggles to cut its debt. She also said that the German government was ready to accelerate the introduction of the €500bn European Stability Mechanism - - the permanent Eurozone rescue fund - - and “to perhaps pay in more capital at the start … if the others are ready to do it.”

"I think [the reforms] will strengthen Italy, will improve its economic prospects and we have watched with great respect how quickly they have been implemented," Merkel told journalists at the Chancellery after meeting Monti.

"I think that, overall, the work of the Italian government will be rewarded and I have said from the beginning that we should work very, very closely together," she added.

Monti said he hoped that "the implementation of good policies would translate to sensible rates" as Italy's borrowing costs remained above the critical seven-percent mark seen as unsustainable.

He had complained in man interview with the German daily Die Welt of possible "anti-European" protests in his country if Rome's reform efforts were not recognized adequately.

"The problem is that despite our sacrifices, we have not got anything in return from the European Union, such as a drop in interest rates. Unfortunately, we have to say that our reform policies have not received the recognition and appreciation in Europe that they deserve," he said.

Italians received a boost on Wednesday from data showing the country's public deficit had fallen to its lowest level since the fourth quarter of 2008, according to the Istat data agency.

Rome has pledged to balance its budget by 2013. At present, Italy's total accumulated debt is over €1.9trn, or 120% of GDP.

The talks exceeded the 90 minutes set aside for the meeting, which  Merkel said had been “a very important exchange.”

“It took a little longer not because we quarrelled but because we had a lot to discuss.” She said Rome and Berlin now had “very good co-operation.” 

Draft fiscal treaty

A copy of the draft EU fiscal treaty [pdf] seen by Reuters will only allow Eurozone countries to incur budget deficits during severe economic downturns or other exceptional events.

The latest draft sets out more clearly when the Eurozone would tolerate a deviation from a budget in balance or in surplus, termed  the medium-term objective.

"Temporary deviation from the medium-term objective will only be allowed in cases of an unusual event outside the control of the contracting party with a major impact on the financial position of the general government or in periods of severe economic downturn for the euro area, the EU or the concerned contracting party," the draft document says.

The balanced budget rule, which demands governments balance their budgets over the economic cycle, is central to the new treaty and the draft sets a provisional timeline for the entry into force of the new regime by the start of next year.

Importantly for Ireland, the draft says it's not necessary to incorporate the balanced budget rule in the Constitution: "NOTING that compliance with the obligation to transpose the 'Balanced Budget Rule' into national legal systems through binding and permanent provisions, preferably constitutional, should be subject to the jurisdiction of the Court of Justice of the European Union, in accordance with Article 273 of the Treaty on the Functioning of the European Union."

The draft also removes a controversial reference to deeper integration in the single market among those who sign up to the pact.

Up to 26 EU countries are expected to back the agreement.

Spain to borrow less this year

Spain's economy ministry said today that it plans to borrow €86bn on financial markets in 2012, down from 2011.

This gross figure is almost €10bn less than the €95.6bn raised by issuing sovereign debt in 2011, said the Treasury. T

Spain's first debt issue of 2012 takes place on Thursday, when the government hopes to raise between €4bn and €5bn in three- and four-year bills.

Banks' ECB cash sets another record

Figures from the ECB today show that Eurozone banks deposited a record sum with the European Central Bank, suggesting reluctance to lend.

Banks put €485.9bn with the ECB on deposit for 24 hours, beating the record set the previous day.

Lenders gain an interest rate of 0.25% for their cash deposited at the ECB, less than they would receive on the interbank market.

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