Tuesday
(0)Anatole Kaletsky, the economics journalist who, despite a fondness for Keynsianism, is one of my favourite columnists, believes Italy's departure from the euro and possible re-creation of the lira is a real possibility, one that needs to be taken with deadly seriousness by financial markets. He says the financial fallout from an Italian divorce could be disastrous:
While detailed consideration of these arguments is probably premature, the practical implication is clear: If the possibility of an Italian withdrawal were ever taken seriously by the markets, foreign holders of Italy’s €1.5 trillion public debt would face enormous losses, big enough to endanger the solvency of many non-Italian banks. In other words, the Italian Government is now in a position to kill the euro and wreck the European banking system merely by threatening to withdraw.
I think he is correct. As I said in my last posting about Hayek's idea of competing currencies operating inside the same country, it is folly to imagine that the cult of the all-wise central banker will not come a cropper some time or later. Many Italian entrepreuneurs might be very glad indeed of an alternate store of value if that country does indeed pull the plug on the euro.
Some scare stories deserve to be ridiculed but I think Kaletsky is on to something. Between now and the Italian national polls next year, it would be smart to keep a very close eye on the euro zone financial markets indeed.
(Thanks to the Adam Smith Institute blog for the pointer. It reaches pretty similar conclusions).
Excellent. That would smash the Brussels kleptocracy beyond repair.
Forza Italia!
Posted by Brian at August 9, 2005 07:43 PM
Entrepreneurs would be glad about what exactly ? Paying euro-denominated liabilities with a devalued currency ?
Posted by Sylvain Galineau at August 9, 2005 07:49 PM
Lest this thread goes on without it, I must make the obligatory mention of the gold standard. Now that we've passed that...
Italy is angry at the ECB for not being inflationary (even though they dole out more notes than the Bank of England and the Federal Reserve). That essentially is the key behind Italy's pre-Euro economic growth - cheap, unsustainable, credit.
If they can't manage with the Euro, perhaps they ought to consider changing their fiscal policies instead, to use Keynesian-speak. Instead of trying to bring back the Italian lira. The Euro may be far from gold or silver, but in Italy, it would seem its having the same effect. And that's good.
Posted by Rajan R at August 10, 2005 04:10 AM
I have to agree that the end of the European dream will be a cause for celebration but before we get too carried away a few points.
The Eurocrats are notorious for either changing or ignoring the rules (seems old golden brown is not averse to this tactic) so it is more than possible that a fudge will emerge to assist Italy.
Most of the politicos speaking are not free marketeers, my guess is that this is just pre election noise that will happily be forgotten once they are in charge of the gravy chain.
Posted by steves at August 10, 2005 08:56 AM
Absolutely priceless! History repeats itself once again!
For those who don't know, there was a nineteenth Century equivalent to the Euro which we were also invited to join. We sensibly declined. It broke up after a few years because of Italy's habit of running up unsustainable deficits.
Posted by David B. Wildgoose at August 10, 2005 08:58 AM
Sylvain, you misunderstand me. The reason I favour competing currencies is so that if currency X collapses, there is a viable, credible alternative in action at the same time into which businesses can switch. I am certainly not in favour of forcing people to adopt a crappy currency like the Italian lira.
Posted by Johnathan at August 10, 2005 09:20 AM
... Italy's habit of running up unsustainable deficits.
Would the Euro become a stronger currency without Italy as one of its members then, if so isn't this a bad thing to have happen?
Posted by Julian Taylor at August 10, 2005 09:59 AM
I think this is a case of history repealing its self.
Posted by M. Simon at August 10, 2005 02:16 PM
