THE EU MUST DO MORE TO HELP THE ITALIAN ECONOMY
Despite political turmoil and emerging risks at the global level, the eurozone has had two years of strong economic growth, at least by its own historically disappointing standards — and even with the United Kingdom lurching toward withdrawal from the European Union. But with the emergence of a populist government in Italy this year, it is not safe to assume that the eurozone’s worst days are behind it.
Italy was the first country that I studied when I entered the financial world back in 1982, so I have a special affection for it. I was working for a very large American bank at the time, and I can still remember joining frequent transatlantic conference calls to discuss Italy’s debt-to-GDP ratio. The question on everyone’s mind was when the country would default; but it never did. Instead, Italy muddled through, and has continued to do so ever since. Still, now that the Italian government seems poised for a standoff with the EU, it would be no surprise if worries about a default were to re-emerge.
As my experience more than 30 years ago shows, Italy’s economic problems far predate its adoption of the euro. It has long had poor productivity by European standards, and that translated into relatively low trend growth in the pre-euro decades.
Of course, there are some who now yearn for the days when the lira could be weakened to restore growth. That is no longer an option under the single currency. But what the pre-euro romanticists overlook is that euro membership has given Italy low inflation, and thus lower interest rates.
There are also some who believe that the eurozone’s fiscal and monetary framework locks Italy into weak nominal GDP growth, possibly too-low inflation, and high debt. Yet before the new government took office, Italy’s cyclically adjusted fiscal deficit — as opposed to its underlying debt position — was often rather restrained compared to the rest of the eurozone, as well as the other members of the G7
NEWS OF THE WEEK
OCTOBER 25: Chief Minister EMS Namboodiripad submitted his resignation and of his Council of Ministers today (Oct 24) after his defeat in the Assembly on a motion demanding a corruption inquiry against ministerial colleagues, including Marxists