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When does Italy break free?
A loyal MR reader asks:
When does Italy leave the EC? What are the likely costs of doing so?
Italy won't leave the EC anytime soon, why should they? I also don't think Italy will leave the Eurozone. It does give them an overvalued currency, but that is only the nominal exchange rate. In the long run prices of exports can fall so the real exchange rate ends up where it should be. In other words, the problem will cure itself with the passage of time, noting that Italian wages and prices are often sticky. But everything adjusts, sooner or later. If Italy can live with the Euro today, tomorrow will be just a wee bit easier.
Leaving the Eurozone would make it very hard for Italy to borrow at good rates again. Plus the real value of their debt would rise considerably. Nope, I don't think they will do it.
#whatever in a series of 50.
Posted by Tyler Cowen on March 31, 2007 at 07:11 AM in Current Affairs | Permalink
Comments
The question was crazy to begin with. Probably the loyal reader doesn't know Italy was one of the founders of the EC / EU. It's like asking when LA Lakers will leave the NBA.
Posted by: Filter at Mar 31, 2007 5:36:42 AM
Filter, there was a time not long ago when four of thirteen founding states of the US (VA, SC, NC, GA) tried to leave the club ...
Re Italy. The EU forces Italy to at least adopt certain reforms to keep up with the Joneses, acts as a heat shield for local politicians and offers a cheap finance fix. Why give it up? This, however, prevents the crisis necessary to truly reform sclerotic Italy.
Posted by: jaywalker at Mar 31, 2007 7:32:48 AM
Jay, did they leave?
Not that I don't agree with you in the Joneses / heat shield /cheap finance part.
Anyway, one thing that is easily forgotten when talking about Italy is how much the different regions that includes are, well, different. Sclerotic Italy? Maybe. But then why is Lombardia's GDP per inhabitant higher than South East England's?
Posted by: Filter at Mar 31, 2007 8:27:34 AM
Northern Italy is Europes most prosperous region.
Posted by: San at Mar 31, 2007 9:34:11 AM
Italy will not leave the EU, ever.
When Silvio Berlusconi was PM, he did make some noises about the
possibility of Italy dumping the euro and going back to the lira.
But, as Tyler accurately notes, this would involve facing substantially
higher interest rates for the large amounts of borrowing the Italian
government engages in. Berlusconi's remark in retrospect looks more
like the sort of "Fed-bashing" one occasionally sees in the US when
this or that politician blames (sometimes not unreasonably) bad
economic conditions on the Fed. The euro and the ECB make a good
excuse, but don't look to Italy to leave the euro anytime soon.
Posted by: Barkley Rosser at Mar 31, 2007 11:00:13 AM
Italy leaving the EU, unlikely in the extreme. The only parts of Europe that have chosen to remain out of the EU are Switzerland (which likes regulating its own financial sector) and oil rich Norway. Opposition to the EU is not a strong feature of Italian politics. And getting out of the EU would be difficult, as some Euroskeptic Brits and Swedes forget.
Leaving the Eurozone-- somewhat more likely, but still pretty improbable. The point about regional differences within is an interesting one-- did anybody in the 1980s suggest that Sicily or Lombardia should leave the lira-area. Before the Euro, Italy's central bank had to make monetary policy for a very diverse country. The Bank of England faces a similar challenge -- Brits opposed to joining the Euro should also ask whether the UK is an optimal currency area.
What about the United States-- is it too diverse for the Federal Reserve to accommodate? Granted workers from California can go to New York and speak the language, but in other ways the USA is pretty diverse economically. Is it really an optimum currency area?
Posted by: andrew smith at Mar 31, 2007 2:21:54 PM
"did anybody in the 1980s suggest that Sicily or Lombardia should leave the lira-area"
Yes: the Northern League, the separatists,....
Italy was accepted into the EU reluctantly by France and Germany because Italy has 110% public debt. So far the Prodi govt did not enact the fiscal measures that he was once advocating to other countries as EU president. He did not cut taxes yet and he produced some fake liberalizations, but we all hope that that will change.
On the other hand, italians have been engaged in patriotic protectionism (not that France didn't either). When will this change?
Posted by: italian at Mar 31, 2007 2:34:13 PM
Tyler, regardless of the particular definition of real exchange rate you're using (you don't define it), prices of most Italian exports will decline only if nominal wages decline. What is the probability of lower nominal wages? For some time Italy has been in the "very long run" and I understand that wages have not declined.
Posted by: Edgardo at Mar 31, 2007 2:39:31 PM
Geramany only brought the budget deficit and the debt /gdp below the EU level, last year .The same is true for France.Both were in the excessive deficit procedure.Of course , only when Italy fails there is an international scandal.
And nobody remember "il sorpasso",when Italy overtook the UK in the late 1980s.in GDP per head.I know it was due to the accounting of the black market economy, but ..
And the unemployment rate of Lombardia is among the lowest in the world if not the lowest.
Posted by: jcm at Mar 31, 2007 3:18:33 PM
I would like to know if the post was a April Fools prank.
My post is not
Posted by: jcm at Mar 31, 2007 3:20:06 PM
Certain commentators should probably investigate the difference between EU and the EMU.
Posted by: Erik at Mar 31, 2007 3:25:36 PM
#35
Posted by: Trieu Truong at Mar 31, 2007 6:27:44 PM
States with a stronger prospective fiscal position arguably have the greater incentive to leave EMU. Will the no-bailout clause really be enforced? Benard Connolly has done some interesting work here.
Posted by: Laeeth at Mar 31, 2007 6:42:49 PM
A joke was told in Germany back in the time when it was being
debated whether or not Italy should be allowed to join the
Eurozone. If you do not get it, I shall not explain, but it
is all too relevant to the current discussion.
A husband and a wife had a house that was painted white. The
wife wanted it to be painted blue, while the husband wanted it
to stay white. Anyway, after some time the husband agreed to
paint it blue. However, it became clear that he was deeply
unhappy with this. So, finally the wife agreed to repaint the
house white. Nevertheless, the husband continued to sulk. The
wife asked him what the matter was. He replied. "I know that it
is white on the surface, but it is still blue underneath."
Posted by: Barkley Rosser at Mar 31, 2007 9:13:09 PM
I second Edgardo, what's your timespan for "tomorrow". As Keynes said, in the long run we're all dead. I'm not aware of how real exchange rates can adjust within the Eurozone without declines in nominal wages, which could take a rather long while.
Posted by: graeme at Mar 31, 2007 10:29:16 PM
Italy is more likely to be kicked out of the euro than to leave it. It is unlikely that Italy can maintain its current fiscal policy indefinitely without defaulting, yet no Italian politician has yet shown a willingness to be the one responsible for introducing austerity to Italian finances.
Posted by: Cyrus at Apr 1, 2007 9:09:51 AM
Cyrus,
There is no legal mechanism for kicking a nation out of the euro.
Will not happen. However, Italy could end up facing various sorts
of unpleasant sanctions if its fiscal profligacy gets too blue.
That might push it to leave, which remains not entirely out of
the realm of possibility, if still pretty unlikely anytime soon.
Posted by: Barkley Rosser at Apr 1, 2007 2:19:54 PM
As far as an "optimal currency area", I like Jane Jacobs arguments that a currency should be controlled/limited to a productive city & its environs for best efficiency. I have seen statements on the Web that her economics are generally not accepted and in some specifics (e.g., income replacing) disproven, but have seen no specific arguments, only unsupported claims.
Posted by: billswift at Apr 2, 2007 8:45:38 AM
Would ever be worth thinking about the possible reaction of the *animal spirits* of the financial markets might be, if Italy leaves the EMU?
Would not it create a "case?" Italy begings, other could follow the same path. And in that case, what about the financial stabiltiy of the entire Eurozone?
Would the financial investors keep still investing in the Eurozone?
-- J.C.
Posted by: Jacopo at Apr 2, 2007 3:23:32 PM
bill:
The end user of money ideally wants their money to be a useful store of value, and to be accepted for all the transactions they intend to make. The technocrat's desire to use small local currencies as a fine-grained way to influence economic policy, having many knobs to turn instead of just one, must fit within the constraints of households' and firms' desire to have usable money: a currency that no one actually uses as money is useless as a knob to turn in economic policy.
As increasing numbers of microeconomic units make economic transactions over increasing geographical distances, the usability gap between currencies used over a small area and those used over a broad area is growing. The technocrat is better advised to attempt fine-grained control of fiscal policy than monetary policy.
Posted by: Cyrus at Apr 2, 2007 10:41:47 PM
Italy will not leave the EU, ever.States with a stronger prospective fiscal position arguably have the greater incentive to leave EMU.
Posted by: Sydney at Aug 8, 2007 7:04:56 AM
only when Italy fails there is an international scandal.
yet no Italian politician has yet shown a willingness to be the one responsible for introducing austerity to Italian finances.
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