Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Tuesday, July 26, 2005

Italy and the Euro

Even if other countries are not playing by the rules of the European Monetary Authority, Stephen Poloz of Export Development Canada says the Euro benefits Italy, and Italy should not withdraw from the union:

First, the euro is not actually strong. It was worth about US$1.20 at its inception in 1999. During 2000-2001 the euro fell to around US$0.85 because of weak global growth and U.S. dollar strength. But the global recovery fostered a rebound in the euro, too, and after overshooting to $1.35 it is now closer to $1.20, where it all began. With the world economy functioning much more normally today, this is the sort of value for the euro that Europeans will need to get used to.

Second, Italy is one of the countries that benefited the most from the monetary union. In 1995, the interest rate on 10-year Italian government bonds was over 13%, while that on German bonds was below 8%. That risk premium of 5% was being paid by every Italian on their mortgages and credit cards. Today, thanks to monetary union, that risk premium is only 0.2%.

Third, Italy’s economic performance has not really changed. Average growth in the six years since monetary union has been 1.4%, and it was 1.5% during the six years prior to 1999. Italy’s economic problems are mostly structural in nature, and dropping the euro would not change that.

Dropping the euro would, however, lead financial markets to worry about a return to high deficits and inflation, and ordinary Italians would pay the price through higher interest rates. The fact is that the rules of euro membership make it easier for politicians to take tough economic decisions.
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