time for a new economic policy?

[iTALY BOUND]

I had read in an article that Italy was considering pulling out of the euro and returning to the lira. I think this would be a good idea because it would allow the government to have more control of its money in such areas as setting interest rates, issuing government bonds ect. I very much hope that the government will consider this knowing that the country is faced with a deficit that is equal to 106% of the nation's gross domestic product. I think that if they do this, they can devalue their currency, which will encourage more exports, and the government could then use this extra money to invest in the manufacturing sector, alternate energy sources, paying down the national debt, and anything else that is needed. These are just my thoughts. What does everyone think of this idea?

Being a student of economics here in the US, I hope i can get some feedback on my solution to this problem. please note that i do not claim to have all the answers to everything that ails this country, i love putting out my ideas though; who knows maybe i will get something right. thanks for reading everyone.

[NickZ]

I'm not sure why you think a lower currency would create more money. Higher tax receipts ?

If they go back to the Lira.

1) All the debt issued in Euros would need to be repaid in Euros. No idea what happened to the old debt when they converted to the Euro.

2) Interest rates would soar. Which would mean problems for everybody from home owners to the government.

3) They would still have a high debt to GDP percentage.

4) Imports would soar in prices.

5) It would cost serious money for everybody to switch back. Plus it would add friction costs for anybody doing cross border trade.

What they need is to get with the French and push for the ECB mandate to be broadened. You could argue they need to start veteoing new Euro and EU countries.

[Charles Phillips]

Where did you read this tosh? What was the date on the article? If I were you, I'd continue my studies in the belief that Italy will remain in the Eurozone.

[iTALY BOUND]

Great points. I should have mentioned this in my previous post but I figured that since Germany was also considering leaving the euro ( as mentioned in the article), others would likely follow in panic. Italy could wait for the value of the euro to drop as a result of others leaving the currency.

As far as the cost of imports, this is very true, but i think that in the long run the country would be better off because of the increase in exports.

Interest rates are something else i completely failed to think about, so that alone is a huge setback unless the government uses revenue from the increase in exports to subsidize business growth with lower interest loans.

Based on your reply, I think that Italy would have to hope that other less debt ridden nations will leave the euro and cause a panic. This will cause the currency to decrease in value and afford italy to pay their loans issued with the damaged Euro in my scenerio.

Very well refuted. I love being proven wrong by someone who can do so thouroughly as you have done. It helps me learn in the end. Thanks. btw I will put a link to the article first chance i get. I should have put it up when i wrote my original post. My mistake, sorry for the lack of citation. It will come though.

[pigro]

I found this piece quite interesting (even though I don't agree with its conclusion).
Sean O'Grady: The euro answered a question we didn't ask - Commentators, Opinion - The Independent

this one If the eurozone is on fire, will the ECB get burnt? | Business | The Observer is more pertinent and makes better sense - and I particularly like its lovely acronym for the spendthrift southern states of Portugal, Italy, Spain and Greece.

[Charles Phillips]

Italybound - you should make us aware of (assuming it is available online: if not, where it appeared in print) the publication in which you read this article. Maybe it is one of the links Pigro has referred to - but without the source it is difficult to comment (or on my part, to disparage more effectively!) So - arm your enemies....be bold.

[pigro]

Originally Posted by Charles Phillips

Maybe it is one of the links Pigro has referred to

very much doubt it - the ones I linked to are just general 10th birthday puff pieces, and neither really major on Italybound's theme. I do however think that there may be attempts to reopen the lira debate in Italy if (when?) economc recession bites and Berlusconi needs to 'rabble rouse'.

[Charles Phillips]

Oh dear, I have just read Pigro's links, and I'm pleased to still count him a friend since he has distanced himself from the complete rubbish penned by Sean O'Grady - (a columnist who moves solid chronological facts into a delinquent forum clock scenario). OMG.

The Observer article is less culpable, but it is wishy washy what if stuff. Both articles come from the assumption that all Europeans saddle themselves with UK type mortgages (no doubt both of the journos who authored this stuff are well in hock) but this is not true (certainly not of Italy). I'm not assuring holders of azioni in Italian banks that they are riding high - but (and this is against my inner instincts) - sometimes the evil alliance of Communism and Catholicism and protectionism does seem to come up trumps, despite itself.

Funny thing is, it seems that only the Brits have taken notice of the 'ten year anniversary' of the Euro: it isn't even that. It is ten years since (Euro entry) currencies were fixed. We were using Lire until (come on someone!) at least year 2000.

[pigro]

Originally Posted by Charles Phillips

Funny thing is, it seems that only the Brits have taken notice of the 'ten year anniversary' of the Euro: it isn't even that. It is ten years since (Euro entry) currencies were fixed. We were using Lire until (come on someone!) at least year 2000.

well, you know, if you didn't get an invite to the party, it's difficult to remember the anniversary :-)

ps. beat you to it by branding both as puff pieces - though the guardian article is IMO quite fair and doesn't (on my reading of it) depend on personal mortgage debt to back it up.

pps. got v. confused there for a mo' - what bright spark at the Guardian decided to name that column 'The Observer' - when you quoted that, I thught I'd linked to the wrong newspaper :-)

[NickZ]

Germans may be the only ones who really like the Euro at the moment. It was a few years back when their economy was hurting and the ECB was doing the "We only care about inflation" bit that they weren't happy.

I still say the ECB is pushing the Eurozone into a serious recession. I can understand the rationale for this but I think they're nuts. It won't solve the inflation issues. So all that leaves is the political angle and I don't see how/why the unelected ECB gets to make those choices.