Why Italy Should Leave The Euro

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We here in Britain were lucky – Gordon Brown was Chancellor. OK, well, not lucky exactly, not in totality, as he screwed large parts of the economy with his policies. But those five tests about the euro, he was entirely correct there. For example, we really did have to have a mortgage market like Germany’s – fixed rate for long terms – before we entered into a monetary union with Germany. Without that the effects of interest rate changes would have been grossly exaggerated, as they were in Ireland and Spain.

Yes, this is true, the failure of the euro as a concept wasn’t 2008, it was the booms in those two countries before it.

Mortgages aren’t a great problem in Italy as much of the country doesn’t have one. Property, much more than elsewhere, tends to be inherited not bought.

But here’s why Italy should still leave:

Italy is – or perhaps more importantly, Italians are – being screwed by membership of the euro. The exchange rate is wrong, they can’t vary it, the interest rate is wrong and they’ve no control over it. They simply should not be in monetary union with Germany (or, to be precise, Benelux and Germany might be worthy of monetary union but no one else is).

Therefore Italy should leave the euro. And the politics of that is such that if they do then they’re going to be leaving the EU as well and that’s the end of the project.

We should all be shouting Huzzah! at this of course for the European Union is itself a bad idea and an organisation that no one should belong to.

And here’s the thing. Sure, political dreams and all that, ever closer union etc etc. But to get there it has to be true that there is fiscal union. And the Germans just aren’t going to be willing to pay Italy’s soon to be 150% of GDP government debt pile. And the Italians aren’t going to accept the sort of austerity needed to pay it down either. One or t’other side is going to refuse to do what must be done to keep the euro and EU going. Therefore the euro and EU won’t. For when the economic reality ordure hits the spinning cooler device of political dreams it’s the fan that gets messy not the shit that stops smelling.

The only question is how long oh Lord, how long?

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Leo Savantt
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Leo Savantt

If you take the economist’s position of course the Euro is damaging to Italy and the Italians should revert to the Lira.

However, if you take the EU’s position, which is an ideological political one, of course Italy must remain in the Eurozone, for how else can “ever closer union” be achieved?

Esteban
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Esteban

I remember someone writing about Davos or some other meeting of the wise & wonderful many years ago. In one room the economists were in agreement that the EU would not work unless there was a true fiscal union (which there would not be). In another room the political analysts were in agreement that the EU was going to happen.

john77
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john77

If Italy leaves the Euro it can go back ti its previous practice of running a higher inflation rate than Germany and gradually eroding the value of its stock of debt. Interest rates on government debt being lower than the rate of inflation helps Italy and other debtors – but Germany is holding down the rate of inflation. The lira inflation was – and would be again – much greater than German inflation leaving greater scope for a big margin between inflation and the interest cost. Leaving the Euro gives Italy a chance of avoiding the crunch when debt *costs*… Read more »

Phoenix44
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Phoenix44

But if you are Italy, why leave? Wouldn’t you bet that the Germans are forced to take on your debt? The euro has created a huge moral hazard problem.

Boganboy
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Boganboy

Frankly, I’d expect the Germans to just give Italy the finger. But then I always expect other people to be like me.

Wheels
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Wheels

I agree. They will either have to bail them out or accept a higher inflation rate for themselves. Neither will be warmly received by the german population but everyone’s been OK with the slow, steady devaluation of the Euro, now close to the dollar.

Bloke in Germany
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Bloke in Germany

Alternatively, Italy could take the radical step of liberalising its economy, principally the labour market, to enable productivity to increase. Without doing that, Italy and all other countries that are overregulated compared to Germany (which isn’t exactly light-touch on the regulation stuff) will not keep up.

Or they could retain their strangled labour market, accept that that means being poorer, and just stop spending their great-grandchildren’s cash.

Is it really that much of an ask?