Edward Hugh writes about the obstacle posed by Italy's membership in the Euro to that country's recovery prospects from a recession which seems to be of a more than routine character. In the old pre-Euro days the country could simply have allowed its currency to depreciate in order to regain export competitiveness, but now that this is (supposedly) no longer an option, only one possibility remains, namely deflation.
Unfortunately, this is a route whose outlines are known all too well from the era of the Great Depression and Japan's post-bubble economy, and whether the Italians are willing to undergo the requisite sacrifices for the sake of "ever closer union" is far from clear. What is clear at this point in time is that the Eurozone is as far from being an optimal currency area as ever; labor mobility is a shadow of what it ought to be, with Italians generally unwilling to move from the depressed south to the northern part of their own country, let alone to other countries with their own differing languages and customs; on the other hand, the accession of several new and much poorer Eastern European states means that the notion of Italy receiving lots of new funds in EU aid is more unpalatable than it has ever been. Something must eventually snap, and the betting is that it will be Italy's participation in the Euro, current tough talk notwithstanding. That the more Eurosceptic Swedes are taking full advantage of the freedom they chose to retain to set their own monetary policy will not be lost on Italian observers.
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