Italy’s economic woes

Martin Wolf’s Wednesday column provides an excellent explanation this week of why Italy is in trouble. Italy should never have joined the euro. In theory, countries can avoid devaluation by increasing productivity and lowering wages. In practice, this is politically difficult. In the case of Italy, it is impossible. If Italy had kept the lira, it could easily devalue its currency and regain competitiveness with other countries of the euro zone (primarily Germany).

Columns like this are the reason I subscribe to the Financial Times.

The story of Italy is revealing and, given its size, of crucial importance. This is not to blame the euro for the stagnation of Italian productivity and output since it joined the eurozone. These reflect domestic failings. Nevertheless, the fact that Italy is inside the eurozone makes its failings a matter of shared concern. It also destroys the link between politics and power. Not least, it turns what would otherwise have been brief exchange rate crises into long-running macroeconomic disasters. ….

The mechanism of adjustment in the eurozone is … essentially that of the 19th-century gold standard. Prolonged recessions are a feature, not a bug. They are how competitiveness adjusts to changing circumstances. ….

Good fences make good neighbours. A currency of one’s own is a good fence. It is such a pity this was forgotten.

Martin Wolf, “The Italian challenge to the eurozone“, Financial Times, 20 June 2018 (gated paywall).

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