BERLIN -- German Chancellor Angela Merkel said Thursday she is confident that Italy's reform drive will help push down the country's borrowing costs, but underlined her resistance to another idea that could drive them lower -- giving the region's permanent rescue fund a banking license.
Merkel spoke after meeting Premier Mario Monti, who became the leader of the 17-nation eurozone's third-largest economy late last year with a government of technocrats. Monti has pushed through a reform agenda that has included the revival of property taxes, higher sales taxes, slashing spending and raising the retirement age.
Merkel praised the "impressive" reform agenda and pointed to a "hopeful signal" from recent Italian bond auctions, in which the government's borrowing rates dropped. The difference between the borrowing rates of Italy and Germany, Europe's strongest economy, nevertheless remains high.
"I am firmly convinced that the reform course that the Italian government ... is pursuing is a, or the, significant contribution to the interest rates developing downward," Merkel said at a news conference alongside Monti.
Monti said that "Italy has achieved great successes (and) the markets are in the process of recognizing these successes."
On Wednesday, Italy paid sharply lower interest rates to raise (euro) 9 billion ($11.25 billion) in six-month treasury bonds. On Tuesday, longer term bonds, including 10-year debt, also sold briskly at lower interest rates.
Most economists attribute the drop in borrowing rates this month mainly to expectations that the European Central Bank will approve a plan to buy the government bonds of Spain and Italy if they first request help from the eurozone's rescue funds.
Merkel has sounded in favor of such a plan, which would give Spain and Italy the time to implement their reforms.
Germany is firmly opposed to another possible relief measure: giving a banking license to the permanent rescue fund, the European Security Mechanism -- which can't start work before Germany's highest court rules Sept. 12 on its legality.
The move would increase the (euro) 500 billion ($626 billion) fund's firepower by enabling it to borrow from the ECB.
Germany dislikes talk of giving unlimited firepower to the fund and has been firm in demanding reforms and budget cuts in exchange for help. Merkel said the ECB president, Mario Draghi, has argued a banking license wouldn't be compatible with European treaties -- "and that is also my conviction."
Monti agreed that such a move could require treaty changes but suggested it could be a possibility in the longer term.
"Some things that aren't possible today could be tomorrow under certain conditions," he said.