Italian PM to meet Merkel in Berlin amid fears of Euro recession

Italian prime minister Mario Monti will meet German chancellor Angela Merkel in Berlin on Wednesday ahead of an Italian debt sale that is likely to focus fresh concern about the future of the euro and the region's worsening economic crisis. Next week's Italian bond auction is the first in a series of bond sales throughout the eurozone in the coming weeks and will be a litmus test of government responses to three-year-old debt crisis. As leaders returned to their desks after summer vacation this week, there was speculation about a pending European recession as a key index of business activity posted the seventh consecutive monthly contraction amid an accelerating decline in Germany's industrial output. The spread between Italy's 10-year bond and the German bond rose to 450 points before pulling back to 435 on Friday and investors were particularly wary after Merkel's meeting with Samaras over the country's bailout package. Merkel is also facing a backlash in Germany after a meeting with Greek prime minister Antonis Samaras in which he sought greater flexibility on meeting his country's austerity targets. "We need breathing space," Samaras said at a joint media conference with Merkel in Berlin on Friday. Merkel said she was "deeply convinced" Samaras would make every effort to solve the country's problem and he deserved support. "I want Greece to stay in the euro zone and that's what I'm working for," Merkel said. Berlin has repeatedly called on Athens to uphold its commitments. Before it receives 31.5-billion-euro in bailout funds, Athens must slash 11.5 billion euros from its budget and reduce its deficit to less than 3 percent of gross domestic product by 2014. Mark Cliffe, chief economist of the ING Group, has warned that politicians who are "toying with the idea" of Greece's departure from the eurozone could provoke an exodus of other countries. "The costs of sustaining the European Monetary Union in its current form are large and growing," Cliffe said in his latest report. Meanwhile Monti, known for his harsh austerity measures, has signalled a new approach to promote growth as Italy is struggling with its fourth recession since 2001. But while the Italian cabinet met to consider measures to lift the country out of the doldrums on Friday, protests in the Sardinian city underscored the country's precarious economic situation. Hundreds of workers have been protesting there since Alcoa, the world's third largest producer of aluminum, confirmed plans to close a major plant on the island. On Friday workers from the plant defied police and dived into the sea off the coast of Sardinia to stop a ferry from docking in protest against the plant closure. The US company has promised to retain all the workers at the plant until the end of the year, but later announced that it would start reducing production at the smelter from September. The move could not have come at a worse time for the Italian government as it seeks to create jobs, particularly for young people. "What is the government waiting for?" said Maurizio Zipponi, worker and welfare spokesman for the centre left Italy of Values party. "The workers' protest which blocked the port of Cagliari today cannot be ignored by the cabinet. The plants will be closed soon and the future of thousands of families is hanging by a thread," he said. Since Monti replaced former premier and billionaire businessman Silvio Berlusconi last November, he has reduced the country's deficit and lowered borrowing costs through measures including tax increases on fuel, real estate and consumer goods. Deputy industry minister Mario Ciaccia has proposed tax incentives of up to 50 billion euros on projects such as the construction of highways and ports, while labor minister Elsa Fornero has outlined benefits for companies that invest in training workers and create jobs for young people. Pier Luigi Bersani, head of the main centre-left Democratic Party called for urgent job creation. "If Italy thinks that the politicians are not able to pull us out of the crisis, we will be on the margins, " said Bersani.