Italy was hit by a credit downgrade amid warnings of a double-dip recession in the eurozone from the IMF. The EU has defended Italy's austerity measures, but contagion fears remain in the bloc.
Italian Prime Minister Silvio Berlusconi was quick to reject a long-feared assessment from ratings agency Standard & Poor’s that saw Italy’s credit rating downgraded by one notch on Tuesday.
Berlusconi said the assessment "seemed dictated more by newspaper stories than by reality and appeared to be negatively influenced by political considerations."
In Brussels, the European Commission avoided criticizing the S&P downgrade.
But the EU did support Italy’s austerity measures, saying the country would manage to pay off its sovereign debt by 2013.
Last week, the Italian parliament approved a number of austerity measures, including higher taxes, pension reform and spending cuts which, it’s said, will reduce Italy’s deficit by more than 54 billion euros ($70 billion) over the next three years.
Protesters in RomeItaly's austerity measures have sparked public protest
EU Commission spokesman Amadeu Altafaj said he did not think the austerity measures would stunt Italy’s much-needed growth.
"Unfortunately, some member states cannot afford the luxury of expansive fiscal policies to support the economic activity," said Altafaj.
"In the case of Italy, the fiscal space is relatively small and it is very important that fiscal consolidation sets the ground for sustainable growth," he said.
But the EU Commission spokesman did echo Standard & Poor’s belief that Italy needs urgent political reform.
"It is essential that the country pursues a bold reform agenda with comprehensive measures to tackle the deep-rooted structural weaknesses of the economy," said Altafaj, "so, there is a clear need […] to implement an agenda of growth as a matter of urgency."
Double-dip recession danger
Chief IMF economist Olivier Blanchard Chief IMF economist Blanchard warns of 'dangerous new phase'
But so far Italy’s cuts have done little to inspire investor confidence.
The credit downgrade caused nervous market reactions and German investor confidence was also at a three-year-low.
European stocks ended 1.9 percent higher at 933.63 points, but investments were down and largely overshadowed by the latest World Economic Outlook report from the International Monetary Fund (IMF), which has signaled a "dangerous new phase" for the global economy.
"Markets have clearly become more skeptical about the ability of many countries," said IMF chief economist Olivier Blanchard, "to stabilize their public debt."
The United States was among those countries to suffer a downgrade in the new IMF report, with gross domestic product growth estimated at 1.5 percent this year and 1.8 percent in 2012.
A political gridlock in Washington - over how the US should handle its debt - and ongoing fears of contagion from Greece’s debt crisis are fueling insecurity, according to the IMF.
Growth in the 17-nation eurozone was projected to slow by about a half point to 1.1 percent in 2012.
The negative outlook for the US and Europe has raised the possibility of a double-dip recession.
The IMF says if countries fail to keep their commitments "the major advanced economies could fall back into recession."