European Central Bank President Mario Draghi said Friday that countries with a high public debt should not increase it further and should respect the EU's budget rules. "Lack of fiscal consolidation in high-debt countries increases their vulnerability to shocks, whether those shocks are autonomously produced by questioning the rules of EMU's architecture, or are imported through financial contagion," Draghi said in a speech. "So far, the rise in sovereign spreads has been mostly restricted to the first case and contagion across countries has been limited.
"Such developments feed into tighter bank lending conditions for the real economy. "To date, though some repricing in bank lending is happening where the rise in spreads has been more significant, overall bank funding costs remain near historical lows in all large countries, thanks to a steady deposit base.
"To protect their households and firms from rising interest rates, high-debt countries should not increase their debt even further and all countries should respect the rules of the Union".
The Italian government is currently in a tussle with the European Commission over its plan to run a deficit of 2.4% next year.
The Commission may open an infringement procedure on the grounds that the budget plan breaches the Stability and Growth Pact.
The government has said an expansive budget is needed to finance key pledges and boost sluggish growth.
Italy has a public debt of over two trillion euros, more than 130% of GDP.
The spread on Italian State bonds has increase significantly in recent months.
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