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by the Euro Zone framework, with the caveat that the virtual stagnation of the Italian economy could also be due to an outdated international specialisation, challenged by emerging countries in the new division of labour within globalisation.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.