Friday, July 6, 2018

Should Italy Leave the Eurozone? If So, How?

Italy has fared incredibly poorly as a member of the Eurozone. Per capita GDP in Italy today is no higher today than it was when Italy initially joined the Eurozone in 1999. Youth unemployment is 33 percent. No wonder Euroskeptic populists have taken over in that country.
But the conventional wisdom seems to be that, no matter how rotten a deal Italy is getting as a member of the Eurozone, they have no choice but to stay put because leaving would be worse.
Joseph Stiglitz begs to differ. He says:
"Italy’s new leaders are right that the eurozone is badly in need of reform. The euro has been flawed since its conception. For countries like Italy, it took away two key adjustment mechanisms: control over interest rates and exchange rates. And instead of putting anything in their place, it introduced tight strictures on debts and deficits — further impediments to economic recovery.
The result for the eurozone has been slower growth, and especially for the weaker countries within it. The euro was supposed to usher in greater prosperity, which in turn would lead to renewed commitment to European integration. It has done just the opposite — increasing divisions within the EU, especially between creditor and debtor countries.
The resulting schisms have also made it harder to solve other problems, most notably the migration crisis, where European rules impose an unfair burden on the frontline countries receiving migrants, such as Greece and Italy. These also just so happen to be the debtor countries, already plagued with economic difficulties. No wonder there is a rebellion....
A timid and inexperienced Greek government chose to stay in the currency union. The result was stagnation. By 2015 the country’s GDP had plunged 25 percent from its pre-crisis level. Since then, it has barely budged.
Italy has the opportunity to make a different choice. In the absence of meaningful reforms, the benefits for Italy of leaving the euro are clear, straightforward and considerable.
A lower exchange rate will allow Italy to export more. Consumers will substitute Italian-made goods for imports. Tourists will find the country an even more attractive destination. All of this will stimulate demand and increase government revenues. Growth will increase, and Italy’s high level of unemployment (11.2 percent, with 33.1 percent youth unemployment) will decrease....
From an economic perspective, the easiest thing to do would be for Italian entities (governments, corporations and individuals) to simply redenominate debts from euros into new lira. But because of legal complexities within the EU, and because of Italy’s international obligations, it may be preferable to enact a super-Chapter 11 bankruptcy law, providing expeditious recourse to debt restructuring to any entity for whom the new currency presents severe economic problems. Bankruptcy laws remain an area within the purview of each of the nation states of the EU.
Italy could even choose not to announce that it’s leaving the euro. It could simply issue script (say government bonds) that would have to be accepted as payment for any euro debt obligation. A decrease in the value of these bonds would be tantamount to a devaluation. This would at the same time restore the efficacy of Italy’s monetary policy: Changes in central bank policy would affect the value of the bonds....
To be sure, one shouldn’t underestimate the costs of a large devaluation. Any large change in a key price in an economy is a significant perturbation.
The price of foreign exchange is, of course, pivotal in any open economy. It has knock-on effects on the prices of all goods and services. Some — perhaps many — firms will go bankrupt. Some — perhaps many — individuals will see their real incomes decline.
But it’s equally important not to underestimate the costs of Italy’s current malaise. If Italy’s economy had spent the 20 years since the euro’s creation growing at the rate of the eurozone as a whole, its GDP would be 18 percent higher.
The cost of persistent unemployment, especially among its youth, is enormous. Young people in their 20s and early 30s should be honing their skills in on-the-job training. Instead, they are sitting home idle, many of them developing a resentment toward the elites and the institutions they blame for their predicament. The resulting lack of formation of human capital will also dampen productivity for years to come.
In an ideal world, Italy wouldn’t have to leave the eurozone. Europe could instead reform the currency union and provide better protection for those adversely affected by trade and migration.
But in the absence of a change of direction by the EU as a whole, Italy needs to remember that it has an alternative to economic stagnation and that there are ways of leaving the eurozone in which the benefits would likely exceed the costs.
If the new Italian government were to successfully navigate such an exit, Italy would be better off. And so would the rest the Europe."
Perhaps it has come time to think the unthinkable. Unless you believe Merkel and Macron are on the verge of successfully reforming the :Eurozone. If so, I have this really excellent bridge you might want to take a look at....
About this article
Italy is right to consider leaving the EU’s common currency area.

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