Eoin Treacy's view -
The euro is irrevocable. It was designed as Hotel California: “you can check out any time you like, but you can never leave!” However, we know that it would be wrong to take it for granted. Italexit could still happen as the unwilling and messy result of an unbearable deterioration in public finances and economic performance, combined with misguided political will and financial market turmoil. It would be a huge mistake. Much better, and less costly, would be to address the underlying problems, allowing Italy to survive and thrive within the euro by enhancing potential growth and economic resilience.
It would be wrong to conclude that Italexit, or exit from the monetary union by any other Member State, is going to be an easy process that can be evaluated with a straight cost-benefit analysis and smoothly managed in an orderly way. While Roger Bootle, one of the advocates of the return to national currencies, came to somewhat different conclusions, he acknowledged that the exit merely being the reverse of the construction process does not make it easy: “it would be the equivalent of unscrambling an omelette”.
In the case of Italexit, redenomination and default would become very likely and would cause a number of side effects and negative spillovers into the economy. Exit without redenomination would lead the debt-to-GDP ratio to reach 190%, assuming 30% devaluation, making default even more likely. Hence, Italexit would not address the issues its proponents claim it would address, while producing significant financial instability. Just mentioning it as a viable solution as part of a political platform would imply risks of making it a self-fulfilling prophecy. The economic, social, and political consequences would be enormous and last for a number of years.
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It has been my view for some time that the sustainability of the Eurozone is predicated on the assumption previously sovereign populations will accept any set of policies imposed by the European Commission.
The Eurozone’s sovereign debt crisis arose because private sector loans made by banks in ‘creditor’ countries were at risk of being defaulted upon which would have caused a financial catastrophe for their home nations. The solution was to insist private sector debts be absorbed by the governments of the countries in which they were taken, with the result that sovereign debt-to-GDP ratios exploded. Massive fiscal austerity was imposed on the populations of peripheral countries which contributed to lower standards of living and deflation.
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