Italien Italy EMU

nejtillemu.com

Italien - Italy

Too Big to Bail
Expression from Aubie Balton

The European Union must recognize Italy's efforts in fighting the sovereign debt crisis
or risk the third-largest euro zone economy falling into the hands of anti-EU populists
Italian Prime Minister Mario Monti, CNBC 11 Jan 2012

Monti called the breaches of the Maastricht Treaty limits on deficit ceilings by France and Germany,
soon after the launch of the single currency, the "worst mistake in the EU in the past ten years".
CNBC 11 Jan 2012

Germany has long insisted that austerity be the primary strategy used in confronting the ongoing euro-zone debt crisis.
Italy has now joined France in demanding a more nuanced approach.
Italian prime minister seems to have lost his enthusiasm for austerity.
He has begun pursuing a different direction - one diametrically opposed to that which German Chancellor Angela Merkel would like to see.
Der Spiegel, 11 January 2012

Italy
UniCredit shares fell nearly 15pc today on the size of the larger-than-expected discount, 43 procent
which is designed to help the bank meet a new minimum core capital requirement imposed by the European Banking Authority.
Harry Wilson, Banking Correspondent, Daily Telegraph, 4 Jan 2012

Italy and Spain need to borrow a combined € 590 bn in 2012
their yields remain above sustainable levels,
ECB’s efforts at buying debt in the secondary markets have so far been ineffective in holding yields down
John Paulson, Financial Times, December 14, 2011

Italy paid a euro era record yield of 6.47 percent
to sell five-year paper at its first auction of longer-term debt
after the EU moved towards greater fiscal integration at last week's summit
CNBC 14 Dec 2011

In Italy, Chancellor Merkel is seen as having helped engineer, along with the European Central Bank, Silvio Berlusconi's departure.

Mario Monti's weakness is that he is seen as "sponsored" by Berlin and Brussels. All the time spent discussing his plans with European officials undermines his standing at home. As an unelected leader he will have to implement deeply unpopular cuts without a mandate. Rightly or wrongly some of the anger will attach itself to Germany.
Gavin Hewitt, BB Europe editor, 30 November 2011

It did not help that almost as soon as he was elected in Spain, Mariano Rajoy was on the phone to Berlin.

Everything depends on Italy,
because financial markets now fear that it may be insolvent.
Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets
that it will balance its budget and increase its rate of economic growth so that the ratio of its public debt to its gross domestic product will decline in a steady and predictable way.
Martin Feldstein, Financial Times, 30 November 2011

If the Italian government has to continue paying a seven or even eight per cent interest rate to finance its debt, the country’s total debt will grow faster than its annual output and therefore faster than its ability to service that debt.

If investors expect that to persist, they will stop lending to Italy. At that point, it will be forced to leave the euro. And if it does, the value of the “new lira” will reduce the price of Italian goods in general and Italian exports in particular.

The resulting competitive pressure could then force France to leave the euro as well, bringing the monetary union to an end.

But this need not happen. Italy can save both its own economic sovereignty and the euro if it acts decisively and quickly to convince the financial markets that it will balance its budget and increase its rate of economic growth so that the ratio of its public debt to its gross domestic product will decline in a steady and predictable way.

Kommentar av Rolf Englund
Det var väl ett elegant sätt att skriva att euron spricker. If, if, if.
Då förstår alla att det inte kommer att gå.

7.89 % for three years, and 7.56 % for 10 years
The make-or-break question - for Italy and for the eurozone - is whether there is the faintest chance those rates will fall,
without the supply of emergency finance to a highly indebted government that's presiding over a very slow-growing economy.
Robert Peston, BBC Business editor, 29 November 2011

The precedent of Greece, Portugal and Ireland suggests there is little prospect of Italy's borrowing costs returning to non-penal levels without outside help, even if its government of technocrats produces a credible programme both to reduce the mountain of debt and put some fuel in the economy.

IMF för inga samtal med Italien om ett eventuellt låneprogram för landet.
Det uppgav en talesperson för IMF i ett e-postat meddelande på måndagsmorgonen, enligt Bloomberg News.
Tidningen La Stampa rapporterade på söndagen om att IMF förebereder ett låneprogram för Italien på upp till 600 miljarder euro.
DI 2011-11-28, 07:21

Monti Says Merkel, Sarkozy Agree Italy Default Would Lead to End of Euro
Bloomberg Nov 25, 2011

Italian bond yields rise above 8%
So-called “real money” managers – including pension funds and insurers – as well as banks have already begun
offloading their holdings of “peripheral” European debt.
Financial Times, November 25, 2011

Bond yields on short-term Italian debt rose above 8 per cent on Friday as Rome was forced to pay euro-era high interest rates in what analysts called an “awful” auction.

That means both Rome and Madrid have paid more than Athens for short-term debt this week.

If Germany genuinely wishes to save Spain and Italy, it must allow EMU-wide reflation and
mobilize the ECB as a lender of last resort to halt the bond crisis, since the EFSF rescue fund does not exist.
To create a currency without such a backstop is criminally irresponsible.
Ambrose Evans-Pritchard, DT, 20 Nov 2011

10.53 Italian yield passing 7pc
Allt skulle ju bli så bra bara dom blev av med Göran Persson och Berlusconi.
Rolf Englund blog 2011-11-15

Italy’s labour cost competitiveness against Germany has deteriorated by around 50 per cent since the mid-1990s.
How can this conceivably be reversed in a low inflation environment within EMU?
Gavyn Davies, FT November 13, 2011

Many of the most essential labour market reforms will certainly add to unemployment and
deepen the recession in the short run, making the budget problem even more difficult.

With interest rates on its sovereign debt surging well above seven per cent, there is a rising risk that Italy may soon lose market access. Given that it is too-big-to-fail but also too-big-to-save, this could lead to a forced restructuring of its public debt of €1,900bn.
That would partially address its “stock” problem of large and unsustainable debt but it would not resolve its “flow” problem,
a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity.
Nouriel Roubini, FT 10 November 2011

To resolve the latter, Italy may, like other periphery countries, need to exit the monetary union and go back to a national currency, thus triggering an effective break-up of the eurozone.

Eurobonds are out of the question as Germany is against them and they would require a change in treaties that would take years to approve.

Last week, everyone was insisting that the departure of Prime Minister Silvio Berlusconi would calm markets.
On Wednesday, it became apparent that the opposite was true.
After all, what comes next might be worse.
Der Spiegel 9 november 2011

People are worried about Italy's future because they suddenly remember its past. Between the end of World War II and 1994, when Berlusconi was first elected as prime minister, Italy had almost five dozen governments, few of which survived much longer than a year and many much shorter than that. Political chaos was long an Italian trademark before Il Cavaliere was able to impose some order.

The currency bloc is not so much suffering a sovereign-debt or banking crisis as a crisis of governance. How one views this governance crisis will depend partly on where one lives.

To a Northern European, the problem lies in the failure of some member states to control their borrowing or reform their economies to enable them to compete and grow under a single currency.

To anyone in the periphery or living outside the euro zone, the problem lies in the design of the euro,
which has left one of the richest region's in the world unable to prevent a debt crisis in one of its smallest economies
spiraling out of control and threatening to devastate the global economy.
Simon Nixon, WSJ, 8 Nov 2011

What the ECB is being asked to do is provide an open-ended commitment to subsidize Italy's debts by agreeing to underwrite the risk of default.
That is a major transfer of fiscal sovereignty that will de facto make all euro-zone countries henceforth responsible for each other's debts.
Even if the ECB had the legal power to assume this responsibility under the European treaties, which it says it doesn't,
it has no means to ensure countries stick to reform programs and thus minimize the risk of losses for taxpayers.

Ialy's debt crisis spiraling out of control.
Italian government 10-year bond yields have reached a euro-era record of 6.7% — a level from which no other peripheral euro-zone country's bond market has recovered.
Increased European Central Bank bond-buying — last week's purchases were double those of the week before — have failed to halt the slide in prices.
European banks are dumping Italian bonds at a loss and being rewarded by the market.
Given the lack of adequate bailout facilities, many now argue that only an unequivocal commitment from the
ECB to act as a lender of last resort by signaling its willingness to buy unlimited quantities of debt
Simon Nixon, WSJ, 8 Nov 2011

What's more, the ECB's exposure to Italy isn't limited to bonds. It also is providing substantial lender-of-last-resort funding to its banks. When the ECB's total exposure to Greece, Ireland and Portugal grew to a significant proportion of their GDP, it rightly forced them to seek an alternative source of external financing.

Whatever Silvio Berlusconi's faults, which are undoubtedly many,
since when was it thought acceptable for the central bank to effectively decide on what the government in Italy should be?
The now repeated imposition of supra-national policy by an unelected elite on the citizens of the eurozone has got to be ultimately unusustainable.
The dangers of extremist popularism followed in short order by Balkanisation are all too obvious.
Jeremy Warner, DT, November 8th, 2011

Far from promoting growth and political solidarity, which is what the single currency was supposed to do, the euro is in fact achieving the opposite effect, by condemning the eurozone to long term recession and now extreme political infighting

Unless the European Central Bank step in very soon and on a massive scale to shore up Italy, the game is up.
We will have a spectacular smash-up.
Italy is not fundamentally insolvent. It is only in these straits because it does not have a lender of last resort, a sovereign central bank, or a sovereign currency.
The euro structure itself has turned a solvent state into an insolvent state. It is reverse alchemy.
Ambrose Evans-Pritchard, 1 November 2011

If handled badly, the disorderly insolvency of the world’s third largest debtor with €1.9 trillion in public debt and nearer €3.5 trillion in total debt would be a much greater event than the fall of Credit Anstalt in 1931.

The Anstalt debacle triggered the European banking collapse, set off tremors in London and New York, and turned recession into depression. Within four months the global financial order had essentially disintegrated.

The referendum is a healthy reminder that Europe is a collection of sovereign democracies, tied by treaty law for certain arrangements. It is a union only in name.

Certain architects of EMU calculated that the single currency would itself become the catalyst for a quantum leap in integration that could not be achieved otherwise.

The sovereign nation of Germany has blocked every move to fiscal union, whether Eurobonds, debt-pooling, fiscal transfers, or shared budgets. It has blocked use of the ECB as a genuine central bank. The great Verfassungsgericht has more or less declared the outcome desired by those early EMU conspirators to be illegal and off limits.

And as my old friend Gideon Rachman at the FT writes this morning: the Greek vote is “a hammer blow aimed at the most sensitive spot of the whole European construction – its lacks of popular support and legitimacy.”

In many ways, the euro-zone debt crisis is now all about Italy.
The Economist, Charlemagne 24 Oct 2011 with nice pic

In discussions all weekend, including at two European summits, leaders worked on drawing up a package deal to save the euro that should be concluded in another round of summits on Wednesday.

All three of the main issues – the fate of Greece, the “firewall" to prevent contagion and the recapitalisation of Europe' banks - revolved in some ways around Italy: if Greece's debt is restructured, will the markets then turn on Italy, the next most-indebted state in the euro zone? If so, is the new firewall big enough to protect Italy? And does the plan to strengthen banks with fresh capital, so that they can withstand the loss of value of their bond holdings, not place an unfair burden on Italy, whose banks hold vast amounts of depreciated Italian debt?

Angela Merkel of Germany and Nicolas Sarkozy of France thought differently. When asked whether Italy's prime minister had reassured them about doing his homework to draw up a plan to bring down Italy's vast debt and implement structural reforms, Mrs Merkel and Mr Sarkozy first hesitated, then looked at each other and, finally, smirked knowingly. (video clip here, in French)

According to Germany's chancellor, Angela Merkel,
"Italy has great economic strength, but Italy does also have a very high level of debt
and that has to be reduced in a credible way in the years ahead."
However, some economists might disagree with her assessment.
BBC 24 October 2011

The big fear is "contagion" - that a Greek default could trigger a financial catastrophe for other, much bigger economies. And Italy seems to have ousted Spain as the lead candidate for that contagion. Why is that?

As with Greece, she and other eurozone leaders believe the solution is more government austerity - spending cuts and tax rises - by Rome.

The Italian government's debt, at 118% of GDP (annual economic output) is certainly high, even by European standards.

Unlike their counterparts in Spain or the Irish Republic, ordinary Italians have not run up huge mortgages, and generally have very little debt.

That means that according to the Bank of International Settlements Italy as a country - not just a government - is not actually terribly indebted compared with other big economies such as France, Canada or the UK.

Moreover, the large debts of the Italian government are nothing new. It has got by just fine with a debt ratio over 100% of its GDP ever since 1991.

The main reason is because - unlike Greece - Italy is actually quite financially prudent.

The government spends less on providing public services and benefits to its people than it earns in taxes, and has been doing so every year since 1992, except for the recession year of 2009.

Europe’s crisis is all about the north-south split
Anticipating the euro, drachma-denominated 10-year sovereign bonds fell more than 450 basis points
relative to German Bund rates in the three years leading up to Greece’s adoption of the euro in 2001.
Likewise, Portugal and Italy
Alan Greenspan, FT October 6, 2011

The Italian government yesterday raised €7,86bn at an interest rate of 5.86 %,
up from 5.22 % in August, according to Reuters.
That level is inconsistent with Italy’s continued membership in the eurozone.
Eurointelligence 30 Sept 2011

Once the crisis hit Italy, followed by an absolutely inadequate policy response of the Italian government, the crisis has reached a point of No return.
Italy is too big to save with the current set of instruments, including ECB bond purchases, and in the absence of a credible programme of eurobonds,
he concludes that a breakup of the eurozone must now be considered as a probable scenario.
The question is now whether and how the EU can survive such a cataclysmic event.
Wolfgang Münchau in his column in FT Deutschland, ref. by Eurointelligence 21 September 2011

Italian bond spreads surpass 400bp for the first time in this crisis
The bond spreads rose after investors concluded that China is, after all, not going to bail out Italy
Eourointelligence 14 September 2011

There is nothing magical about apparent threshold numbers, but a spreads of 400bp is awe-inspiring because it clearly signals a lack of sustainability.

Den italienska obligationsmarknaden är världens tredje i storlek.
Med dessa väldiga volymer kan ECB inte i längden uppträda som yttersta garant, när de privata aktörerna drar sig undan.
Mer varaktiga stödköp skulle dessutom knappast vara förenliga med reglerna i EU-fördraget.
Johan Schück, DN Ekonomi 9 september 2011

Sedan länge har Italien stora problem med sin konkurrenskraft, vilket bottnar i att arbetskraftskostnaderna har stigit snabbt medan produktiviteten sjunkit. På så sätt går man i otakt med Tyskland och andra länder i norra Europa, medan liknande problem finns i exempelvis Grekland. Den gemensamma valutan har hittills inte medfört något närmande mellan nord och syd när det gäller ekonomisk utveckling.

Diagram i Financial Times
Medan de tyska lönerna har ökat med 5 procent, har de italienska stigit med nästan 40 procent.
Gunnar Jonsson,DN ledarsidan 7 september

Debatterade igår euron med Olle Schmidt i Studio ett.
Jag har jag fortfarande inte från Schmidt hört någon trovärdig lösning på problemet om hur Grekland ska kunna uppnå konkurrenskraft inom euron.
Adam Cwejman, förbundsordförande Liberala ungdomsförbundet, 6 september 2011

Inte heller något svar på de problem som uppstår om situationen för Grekland kvarstår som den är idag.

Man kan i dagarna läsa att var fjärde grek vill lämna samarbetet, det är alltså fler greker som vill lämna euron än svenskar som vill införa den.

Låt Grekland lämna euron
Italiens tillväxt är bland världens lägsta.
Under det senaste decenniet är det av samtliga världens länder bara Zimbabwe och Haiti som har haft lägre tillväxt.
Adam Cwejman, förbundsordförande Liberala ungdomsförbundet, SvD Brännpunkt 3 september 2011

Att köpa upp statsobligationer och utfärda nödlån kan vara till hjälp när stater lider av dålig likviditet – men inte när det är den låga produktiviteten som är problemet.

En del uträkningar som gjorts uppskattar att Grekland skulle behöva en devalvering motsvarande 40 procent för att bli konkurrenskraftigt. Detta skulle kunna vara möjligt om man återgick till att ha en egen valuta.

I Greklands fall handlar det om pris- och lönesänkningar som vissa uppskattar skulle vara i storleksordningen 30 procent.

Att genomföra detta är politiskt omöjligt.

Frågan är hur dessa länder ska nå högre ekonomisk tillväxt när de inte kan konkurrera med just lägre priser och löner.

Nu brådskar det att avveckla euron under ordnade former.
Alternativet kan bli att valutaunionen upplöses i ekonomiskt, socialt och politiskt kaos.
Jonas Sjöstedt, SvD Brännpunkt 2 september 2011

The greatest fear is that one of the Continent’s major banks may fail, setting off a financial panic like the one sparked by Lehman’s bankruptcy in September 2008.
European policy makers, determined to avoid such a catastrophe,
are prepared to use hundreds of billions of euros of bailout money to prevent any major bank from failing.
New York Times, 7 september 2011

Det finns ett känt citat av President Nixon som jag minns som "I don´t give a damn about the Lira".
Rolf Englund blog 2011-06-21

Hans Werner Sinn, chef för det ansedda IFO-institutet
Euro bonds would destroy the euro zone.
In 1995, shortly before the exchange rates for the euro were fixed,
the interest rates on Italian and Spanish debt were on average about 5 percentage points above Germany's.
Der Spiegel 23 Augusti 2011

Italy alone has to raise or roll-over €68bn by the end of September.
You can be sure that a great number of investors will take advantage of ECB intervention between now and then to lighten their holdings, and switch the risk to eurozone taxpayers.
The ECB may have to buy at least €100bn of Italian bonds alone by late September to cap the 10-year yield at 5pc.
Ambrose Evans-Pritchard, August 17th, 2011

The European Central Bank spent €22bn on government bonds last week
Some analysts have worried that because of the size of Italy’s and Spain’s bond markets
– totalling €2,100bn - the ECB could have difficulties in sterilising all its purchases
if it has to carry on buying on such a large scale
FT 16 august 2011

Italien planerar budgetnedskärningar om 45 miljarder euro under perioden 2012-2013
e24 110812

Italian Finance Minister compared Germany and its small-minded Chancellor to a first-class passenger on the Titanic.
When the ship hits the iceberg, everybody goes down together
Rolf Englund blog 20 juli 2011

Italian public debt has been an accident waiting to happen
This is not because recent budgetary policy has been irresponsible.
Instead, it is because Italy has become trapped by two intractable problems
– a high public debt ratio of around 120 per cent of GDP; and a chronically weak rate of GDP growth,
due to its increasingly uncompetitive production sector.
Gavyn Davies, FT blog 17 July 2011

Italian real GDP growth since the nation joined the euro has averaged only 0.6 per cent per annum, and it shows no signs of improving.

A very high debt ratio, together with low real GDP growth and a low inflation rate set by the ECB, is potentially a toxic mix.

A question (to which I don’t have the full answer):
Why are the interest rates on Italian and Japanese debt so different?
As of right now, 10-year Japanese bonds are yielding 1.09 %; 10-year Italian bonds 5.76 %
Paul Krugman, July 16, 2011

Analysföretaget Gavekal skriver i ett marknadsbrev att ”den italienska stormen” hotar euroområdets grundvalar.
Med tanke påd en italienska obligationsmarknaden storlek (1.600 miljarder euro,
motsvarande 14.700 miljarder kronor) är det ett test EMU måste klara”, skriver Gavekal.
Viktor Munkhammar DI 13 juli 2011

Europas ledare möts och pratar, men någon ordning på eurokrisen får de inte.
Röran på finansmarknaderna fortsätter och gäller inte bara Grekland.
Räntetrycket hårdnar även på Italien och Spanien.
DN-ledare signerad Gunnar Jonsson, 13 juli 2011

Not so tender trap
In extreme circumstances, a country can get into a “debt trap”,
in which the interest rate on its borrowings exceeds the growth rate of the economy.
Britain has the benefit, unlike Italy, of being outside the euro and
therefore is not locked into an inflexible monetary policy.
The Times editorial 12 July 2011

A spokesman for Herman Van Rompuy, president of the European Council, denied that senior officials would discuss the state of Italy’s finances
But another official, who requested anonymity because he was not authorized to speak publicly, said Italy would probably be on the agenda
New York Times 11 July 2011

For Italy, the cost of financing its debt rose at the end of the week, though nowhere near the levels faced by Greece. The spread between the yield on the Italian 10-year bond and the German equivalent widened on Friday to 2.36 percentage points, the most since the introduction of the euro.

The cost of insuring Italian debt rose sharply after the country’s trusted Finance Minister became linked to a corruption scandal
There would be huge repercussions if Italy was badly affected because its economy makes up 16.7 per cent of eurozone GDP,
compared with 2.4 per cent by Greece and 1.8 per cent by Portugal.
The Times 9 July 2011

UniCredit plunged suddenly and investor concerns regarding Italy's sovereign debt and contagion risk escalated.
UniCredit shares were briefly suspended after dropping over 6%
WSJ 8 July 2011

Rome is expected on Thursday to approve an austerity drive worth up to 68 bn dollar in savings by 2014,
in a move aimed at reassuring the markets and its European partners on its fiscal discipline.
Financial Times 29 juni 2011

2 triljoner euros
Yields on 10-year Italian bonds jumped 21 points to 4.61pc, threatening to shift the crisis to a new level.
Italy's public debt is over €2 trillion, the world's third-largest after the US and Japan.
Ambrose Evans-Pritchard, 29 Nov 2010

"The EU rescue fund cannot handle Spain, let alone Italy," said Charles Dumas, from Lombard Street Research. "We we may be nearing the point where Germany has to decide whether it is willing take on a burden six times the size of East Germany, or let some countries go."

Italy could fall into a so-called 'debt trap.'
We think that it might take a decade or more of stagnant or falling wages to restore full competitiveness
Roger Bootle and his team over at Capital Economics
CNBC 6 Jul 2010

The only chance of Italy getting its debt-to-GDP ratio below 100 percent would be for it to run a budget surplus of 5 percent over 15 years.

“If doubts grow over whether the Government is willing or able to do this, Italy could fall into a so-called 'debt trap.'

Under this scenario, rising borrowing costs lead the debt-to-GDP ratio to increase at an accelerating rate, leaving the Government with no choice but to default.”

“If the Government were to default on its debts and investors were forced to take a large haircut of say 50 percent, this would wipe out around 80 percent of Italian banks’ tier one capital at a stroke, causing domestic financial market meltdown,"

Italy's outstanding public debt is €1.7 trillion, seven times the size of Greece's.
Italy "is a big systemic piece," said François Chauchat, an economist with GaveKal, a Stockholm-based economic advisory firm.
"If Italy cannot refinance its debt than it's the end of the euro."
WSJ 14 May 2010

So far, markets have deemed Italy less risky than other Southern European nations despite a public debt equivalent to 115% of gross domestic product—about the same as Greece

"If the interest you're paying on debt is higher than the rate of growth, you end up in a death trap, where you're adding to the debt all the time," says Gabriel Stein, an economist with Lombard Street Research, a London-based economic advisory firm. "I don't know if Italy is in a death trap right now."

Italy, saddled with the euro region’s second-largest debt, is the “biggest threat” to the economy of the 16-member bloc, according to Nobel Prize-winning economist Robert Mundell.
Bloomberg Feb. 17 2010

Being a member of the eurozone doesn’t immunize countries against crisis.
In Spain’s case (and Italy’s, and Ireland’s, and Greece’s) the euro may well be making things worse.
Paul Krugman, New York Times January 19, 2009

The PIIGS
The euro zone faces tough times as the PIIGS — Portugal, Ireland, Italy, Greece and Spain —
will need a flexible exchange rate to compensate for the economic slowdown
so some of them may decide to break free from the single currency's straightjacket
Hugh Hendry, Chief Investment Officer and Partner at Eclectica, CNBC 12/1 2009

Millions of migrants have arrived in Greece, Italy and Spain over the past decade.
To avoid serious social problems, those countries need to do a better job of making them feel welcome
Time Magazine March 1st 2010

Grekland skyller krisen på nazismen
"Man lägger helt enkelt vissa penningbelopp på nästa år. Så gjorde alla och Grekland gjorde det i mindre omfattning än exempelvis Italien", sade Pangalos.
DI/TT 2010-02-24

The crushing defeat of the centre-left government and the complete ousting from parliament of its Communist wing, for the first time in 60 years,
was matched by a dramatic revival in the fortunes of the Northern League and Umberto Bossi, its leader.
Financial Times 18/4 2008

Silvio Berlusconi, the billionaire businessman, back in power at the age of 71, becomes prime minister for a third time but his newly named People of Freedom party maintains its majority only as long as Mr Bossi, 66, remains loyal to their coalition.

"Some thougths about the future of the euro"
The real threat to the cohesion of the monetary union is not Italy, or even a post-property-crash Spain.
The real issue is the political gulf between France and Germany.
Susanne Mundschenk and Wolfgang Münchau, Eurointelligence 18/10 2007

One serious open question if whether the countries – Italy, Portugal, Spain, Greece - that have experienced a significant loss of competitiveness and real exchange rate misalignment will be able implement reforms that will increase productivity growth, reduce relative unit labor costs and allow them to regain their lost competitiveness.
Nouriel Roubini, New York University and RGE Monitor, 28/6 2007

Faktum är att de flesta av EU:s stora projekt ligger i ruiner.
Stabilitetspakten som skulle garantera budgetdisciplin hos EMU-medlemmarna har ingen legitimitet sedan både Tyskland och Frankrike bryter mot den, för att inte tala om Italien.
PM Nilsson, Expressen 25/3 2007

Do current account deficits matter inside a monetary union?
Inside a monetary union, currency risk turns into credit risk
Martin Wolf, FT 28/3 2007

Italy’s debt was downgraded on Thursday by two of the world’s leading credit ratings agencies
in a damaging blow to the centre-left coalition government of Romano Prodi, prime minister.
Financial Times 19/10 2006 ..... full text here

The agreements that established the euro contain no provisions to allow exit. However, if some government – let us suppose the Italian one – decided to leave, there is nothing Europe could or would do to stop it.
But what exactly would a government set on such a course – or forced into it – do?
John Kay, FT, 12/9 2006

Some people will conclude that these problems make a break-up of the euro impossible. This would be a profound error. History – not least the establishment of European monetary union itself – shows that, given political determination, practical problems will be overcome. Civil servants, lawyers and bankers are there to ensure that a client’s wishes are met even if misconceived and if the Bank of Italy does not have a plan in its safe, its officers have been failing in their plain duty.

The Italian election result was a disaster for Italy and is a threat to the future of the euro.
Italy is now in the economic condition that normally preceded devaluation of the lira in the years before the single currency. So long as Italy remains in the euro system it will be impossible to devalue, yet it would be equally impossible for a weak left-of-centre coalition, with no real majority, to take the tough economic decisions that might, or might not, restabilise the economy.
William Rees-Mogg, The Times, 17/4 2006

When the euro was first planned many critics argued that a single currency could survive only if it was backed by a single European government. Inside the euro system different national economies would develop separately and would diverge over time. Each economy would have to adjust to unforeseen external shocks, such as the increase in the oil price or in Asian export competition, but the shocks would have different impacts on different countries.

With no recourse to devaluation, countries would have to take painful economic decisions that might prove to be politically impossible; we have recently seen that in France

The structural weakness of the euro is that it is a single currency that has 12 different economies, 12 different electorates, 12 different governments, 12 different budgets and 12 different systems of sovereign debt. In the debt market itself there are 12 different values for the euro.

The euro itself would be expected to survive, but confidence would have been damaged. If Italy had to leave, who else might go in the future? One can expect every effort to prevent Italy leaving, both in Italy and in the rest of Europe. Even the US Federal Reserve would be worried. All uncertainty is bad for financial markets. If Italy leaves, it will be only after a lot more pain.

The narrow election victory by Romano Prodi’s centre-left alliance was the worst imaginable outcome in terms of Italy’s chances to remain in the eurozone beyond 2015.
Wolfgang Munchau, Financial Times 17/4 2006

These are not bets on Mr Prodi’s political commitment to the euro. It would be difficult to find a more pro-European politician than the former president of the European Commission.

These are bets on economic circumstances that might force a government to take decisions that are unthinkable until the moment they become inevitable.

If Italy continues to lose macroeconomic competitiveness, a populist political movement could well emerge with an agenda for euro withdrawal. Let us think the unthinkable and assume some future Italian government brings back the lira. What would then happen to the country’s mostly euro-denominated debt, which now stands at 106.5 per cent of gross domestic product? Italy would almost certainly be unable to service its obligations to investors in full. It would either convert those debts back into lira at an exchange rate unfavourable to investors or it would default outright.

Three factors may explain the markets’ optimism. First is the view that Italy may be effectively trapped inside the eurozone; leaving it would not solve any economic problems. This argument ignores the fact that default is usually not a consequence of rational choice but of panic. Second is the belief that the European Central Bank would ultimately bail out a defaulting member state. This view may underestimate the ECB’s resolve to observe its no-bail-out rule.

Third, even if one accepts the worst-case scenario, it is still highly unlikely that default would occur within the lifetime of a 10-year bond. This argument offers the most plausible explanation for why the markets have not placed a higher risk premium on Italian bonds. It is also explains why bond markets are notoriously poor early indicators of default risk. Bond investors are complacent until they start to panic.

Financial markets cannot force a country out of a monetary union through currency speculation – as they forced Britain out of Europe’s exchange rate mechanism in 1992. But there are other ways for investors to exploit a country’s difficulties in a monetary union. This is why there are parallels between Italy today and the UK in 1992.

Britain’s political commitment to the ERM appeared as unshakable then as Mr Prodi’s support for the euro looks now. But Britain was neither politically nor economically ready to live under a regime of semi-fixed exchange rates. Italy’s membership of the euro is based on similarly shaky foundations. Fourteen years ago, it took investors a few days to expose a political lie.

Ten years on and sterling's ejection from the European exchange rate mechanism on Black Wednesday still has a surreal quality about it.
Financial Times 2002-09-13

Spricker EMU?
Det mardrömsscenario ekonomerna varnade för tycks nu inträffa i Italien
Expressen-ledare 24/3 2006

Italy’s seven years within the eurozone seem consistent with Dante’s famous inscription at the entrance of hell: “Abandon all hope, ye that enter”.
The economic consequences of monetary union have been so serious for the country that they require urgent political action by the next Italian government. Without it there will be no escape from the inferno.
Wolfgang Munchau,Financial Times 20/3 2006

A 16 per cent appreciation of the real exchange rate over the last seven years has led to a loss of competitiveness and falling economic growth. If the trend of the last seven years were to persist for the next seven, the consequences for Italian industry and the solvency of the state would be near-catastrophic.

A constellation that might deliver some of these reforms would be a German-style grand coalition. By this, I mean not the present grand coalition in Berlin but the one that governed between 1966 and 1969. The sole rationale of that coalition was to implement economic reforms that were inconceivable under any other political constellation. Italy faces a similar political situation today.

Italy follows Argentina down road to ruin
Desmond Lachman, American Enterprise Institute (Timbros storebror)
Financial Times 17/3 2006
Desmond Lachman joined AEI after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the IMF's Policy and Review Department and was active in staff formulation of IMF policies toward emerging markets.

An irony of Italy’s unfolding political and economic drama is that many of the current holders of the country’s bloated and ever-increasing government debt were once proud holders of Argentina’s now-defaulted sovereign bonds. As Mario Draghi, Italy’s new central bank governor, warns that the Italian economy has “run aground”, and as prime minister Silvio Berlusconi vents about “the euro having been a disaster for Italy” in the run-up to next month’s election, one has to wonder at what stage Italy’s bondholders will get the feeling that they have been to this sad movie before.

For quite aside from Italy’s disturbing political and institutional weaknesses ... the country’s economic predicament is remarkably similar to that of Argentina in the late 1990s.

The most striking similarity between the two countries is the rigid currency arrangements in which they locked themselves. As a reaction to its mid-1980s experience with hyperinflation, Argentina in 1991 nailed its currency to the convertibility plan cross. It did so in the hope of forcing on the country the low inflation and fiscal policy discipline that it had never before enjoyed.

In a similar effort to impose macro-economic discipline, Italy abandoned the lira for the euro in 1999. It was hoped that high inflation and periodic lira devaluations would give way to fiscal discipline and structural reform. By abandoning its currency, Italy, like Argentina before it, gave up macroeconomic policy flexibility to stabilise its economy. Italy can no longer engage in periodic exchange rate devaluations to rectify losses in international competitiveness. And no longer having its own monetary policy, it has to accept the interest rates set by the European Central Bank even though these might not necessarily conform to Italy’s circumstances. When Jean-Claude Trichet, the ECB president, recently tightened European monetary policy because of high oil prices, did he give much weight to Italy’s cyclical weakness?

If this is not bad enough, under Europe’s fiscal stability pact, Italy is committed to strengthening its public finances at a time of cyclical weakness.

Italy is often mentioned as the country most likely to leave the euro. I disagree.
If any country ever decided to quit that country would be Spain.
Wolfgang Munchau, Financial Times
February 20 2006

On Friday I was in Davos in a panel on the "Ups and Downs of EMU" (European Monetary Union) where ECB head Trichet, Italian Economy Minister Tremont, a few other EU officials and myself were supposed to discuss the following questions:
Will EMU collapse in the future? Which country will exit first? What will be the consequences of a break-up of EMU? How to avoid that? And what are the prospects for the Growth and Stability Pact?
Nouriel Roubini, 28/1 2006

Will EMU survive 2010?
Global interest rates are likely to return to more normal levels. The ‘one size fits all’ policy of the ECB is then likely to become very difficult to bear for countries like Spain and Italy
Daniel Gros, Director CEPS, 17 January 2006
A most impressive list of Board of Directors....

Roberto Castelli, justice minister, said the league planned to present concrete proposals for restoring Italy's former currency at a party meeting on June 19.
"Are Swedes poor because they are the outside the euro?” Mr Castelli asked at a conference in Milan.
Financial Times 8/6 2005

“Does sterling have no economic foundation because it is outside the euro? Is Denmark living in absolute poverty because it is outside the euro?

The anger and embarrassment of other politicians at the league's campaign are tempered by the recognition that the party's purpose is to attract maximum attention as Italy prepares for a general election next year.
In particular, the league wants to discredit Romano Prodi, the centre-left opposition leader who, as Italy's premier from 1996 to 1998 and later as European Commission president, was responsible for taking Italy into the eurozone.

Silvio Berlusconi says Mr Prodi's government fixed the lira against the euro at too high an exchange rate, a problem compounded in Mr Berlusconi's view by the euro's subsequent strength against the dollar and by the European Central Bank's monetary policy.

Kommentar av Rolf Englund:
Dom i Schweiz verkar överleva dom också, ehuru dom inte är med i EMU.