ITALIAN EXPERIENCE WITH THE EURO

Abstract

The paper has been devoted to drawing a provisional balance of the Italian
experience within the Euro Zone in the 11 years elapsed from its inception. We
have seen that prior to the setting up of the single currency, Italy has accepted to
play the convergence game with the financial conditions prevailing in
Germany, the main and the pivot country of the subsequent attempts to create
in Europe an area of monetary stability, as a precondition to establish eventually a monetary union within the EU, in order to avoid competitive depreciations or devaluations putting in jeopardy the correct functioning of the single
market, on a non discriminatory basis or in levelling out starting points among
partners. During the convergence game Italy's monetary constitution underwent a dramatic change, giving up a traditional set of lax policies nurturing the
vicious circle of inflation-devaluation-inflation. The transition towards a new
stance of monetary stability and anti-inflationary reputation was not without
troubles, as it was shown by the withdrawal of the national currency from the
ERM in the period 1992-1996, but was made possible by the loyalist choice to
accept to tie one's hand within the latter, or by the strong currency option
implied in the link between the lira and the German Mark, thus importing credibility in international markets while forsaking to produce inflation by surprise. Once included in the Euro Zone, however, Italy was possibly penalised in
terms of decreased growth rates by the mix of monetary and fiscal policies
allowed by the Euro Zone framework, with the caveat that the virtual stagnation of the Italian economy could also be due to an outdated international specialisation, challenged by emerging countries in the new division of labour
within globalisation. Even worse, also for Italy, as for the rest of the peripheral
countries with a past low record of financial stability, some divergences due to
high relative unit labour costs compared with the internal devaluation implemented by the policy of wage restraint followed by Germany came to the fore,
possibly putting at risk in the future its permanence in the Euro Zone.