Calling bullsh$t on the concept that Italy isn’t a victim of the euro

Note: This post was first published on Patreon on 29 May 2018

One of the benefits of writing behind a paywall is that I am more likely to say exactly what I think. Case and point comes from this post on Bloomberg about why the euro is so lovely.

Here’s what it says:

The common currency’s proponents have a strong case, they just need to make it more convincingly…. What the euro has failed to achieve, at least so far, is its major political goal of fostering a shared European social identity.

Total rubbish.

And you know it.

Just go back to Wynne Godley for goodness sake. He predicted the euro crisis when its architecture was decided and before the euro was even formed. That was back in 1992.

Five years later in 1997, Charles Goodhart also outlined why the euro was destined for a trial by fire. And just as with Godley, his predictions came true.

So this talk about the euro only benefiting Italy and Italy not being a victim is complete nonsense, pro-euro propaganda.

Here’s the problem in a nutshell: the euro’s architecture reduces policy space and amplifies the magnitude of business cycles. This is because euro area governments no longer have control of any of the levers of macro policy.

Now, we know that countries like Italy don’t control monetary policy because that’s now controlled by the ECB. But what most people fail to appreciate is that this necessarily means that fiscal space is also limited.

Fiscal policy space is limited first and foremost because of the threat of default. We see that in Italy as the prospect of large deficits has raised the spectre of default and caused Italian bond yields to skyrocket. But even worse is that when the economy most wants deficits, there is less space to provide them because of that spectre of default. So governments are forced to act pro-cyclically, spending liberally when all is well and then suddenly ratcheting back abruptly as the tide comes in.

This amplifies the booms and busts within a business cycle. Think about it, just a year ago, all was well in Italy. The whole problem with Italian banks was receding and yields were reaching record lows.

I wrote how euro area was “doing extremely well right now.” And how “that’s great for the Italian banking system too” because it helped to recapitalize them, which would eventually help increase credit growth. But my message was crisis was destined to return to Euroland when the political impasse created by Italy’s lack of growth came to a head. And it has done.

Now people are acting like all that needs to be done is to better sell the benefits of the euro to the people of Italy, who have been living through twenty years of economic stagnation.


Italy needs growth. And for Italy to have economic growth it needs credit growth. And for credit growth to occur, banks have to be well-capitalized enough to make new loans and economic prospects have to be positive enough that people and businesses want to take on credit.

You don’t get there without a catalyst. Italy needs to clean up its non-performing loan problem. And they can’t do that because the government doesn’t have the funds to do so and no funds are coming from Italy’s ‘European partners”. Moreover, Italy needs a boost to demand that can only come from Italian government deficit spending due to private sector distress. But they aren’t feasible because of the euro’s design. Italy could get fiscal transfers from the EU. But those are not available, again due to the euro’s design.

The reality is that Italy is in a bad place as a part of the euro area. This is the best of times, folks. It doesn’t get better than this in Europe. And Italy is still limping along.

Either the electorate will accept more stagnation within the euro area as Greece did or it will eventually vote to leave. When the Italian electorate finally gets fed up with stagnation and votes to leave, all hell will break lose. That’s when we will need to worry. We’re a long way from that happening.

But be under no illusion that the euro isn’t the problem. It is the problem and Italy is it’s biggest victim.

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