New Italian Prime Minister Mario Monti is under more pressure than any other European leader. He knows that the failure of a country the size of Italy would kill the euro zone.
"The end of the euro would cause the disintegration of the united market," he said in his maiden speech in the Italian Senate on Thursday. "The future of the euro also depends on what Italy will do in the next week."
Mr. Monti's speech, which outlined Italy's fiscal and competitive problems and presented plans to fix them, came as European leaders urged him to repair the damage left by his predecessor, Silvio Berlusconi, and Italian premiers before him.
In a note to Mr. Monti, German Chancellor Angela Merkel said "there are many hopes and expectations set on you. It would behoove you and your government to decide upon and implement decisive and significant reforms."
The coming week is critical for Mr. Monti, Italy and the euro zone. He has to gain the support of the elected lawmakers – Mr. Monti and his entire cabinet are unelected officials – and win a Friday confidence vote in the lower house Chamber of Deputies.
He must then put flesh on the bones of new programs designed to stabilize Italy's enormous debt, raise tax revenues to crunch the budget deficit, prevent a run on the country's fragile banks and make the perennially sluggish economy more competitive.
Ensuring the success of the economic reform measures looms as his biggest challenge; he could lose the support of the elected lawmakers at any time.
Even though European leaders applauded Mr. Monti's arrival, the markets remained unconvinced that the euro zone debt crisis would vanish any time soon. On Thursday, sovereign bond yields continued to rise, after soaring earlier in the week, even as the European Central Bank bought debt in the secondary markets.
Spain is the latest country in the debt crisis spotlight. It was forced to offer record-high yields of just under 7 per cent, the highest borrowing costs since 1997, at a Thursday auction of 10-year bonds.
French debt is coming under pressure too. Paris sold €3.33-billion ($4.6-billion) of five-year bonds at 2.82 per cent, a significant increase from the 2.31 per cent at the previous auction. The spread between 10-year French bonds and equivalent German bonds, considered Europe's least risky debt, is now at a euro-era high of two percentage points. Before the debt crisis began in earnest with the bailout of Greece in the spring of 2010, there was little difference between the two countries' yields.
Mr. Monti pledged to implement the austerity measures recently passed by Mr. Berlusconi's centre-right government. On top of them, he plans to reinstate property taxes on principal residences, crack down on tax evaders and reform pensions.
Mr. Monti, a respected economist and former European Commissioner, said he would concentrate on growth, a hint that he is not prepared to launch vicious austerity programs like the ones in Greece, which have been blamed for deepening that country's recession and pushing up unemployment rates. "But we won't be credible unless we grow," he said.
To spur growth, he plans to reduce the tax burden on employers in an effort to create jobs and reduce the size of government and the civil service, Europe's costliest.
Mr. Monti got a little boost from Fitch, the debt rating agency. In a report released Thursday, it noted that the debt contagion is spreading but that "Fitch does not believe [an Italian]sovereign default is a likely event" and that Italy's credit rating is likely to "remain investment grade." Fitch, however, did say that Italy is probably back in recession.
The main risk to Mr. Monti's reform efforts is keeping his job long enough to see them through. Mr. Berlusconi's Popolo della Liberta party remains intact and powerful. Its new leader, Angelino Alfano, is already hinting that his support will not go beyond the austerity and reform promises that Mr. Berlusconi made last month to the European Union. He also favours early elections.
"This stance de facto annihilates a significant part of the centre-right's support for the more ambitious and far-reaching structural reforms that Italy urgently needs," the French bank Société Générale said in a note Thursday.
As Mr. Monti was delivering his speech, thousands of protesters, many of them students, took to the streets of Milan, Rome and Palermo. Clashes with police resulted in several injuries and one journalist was hurt.
The protests were aimed at the austerity measures, notably education cutbacks, and what the Milan protesters called Mr. Monti's new "bankers' government," a reference to Corrado Passera, CEO of Intesa Sanpaolo bank, who is the new economic development minister.