Paul Krugman had a strange piece in the New York Times yesterday. He said that many of Europe’s problems came from the “…disastrous decision, a generation ago, to adopt a single currency. …. And while countries like Iceland that retained their own money were able to quickly regain competitiveness by devaluing their currencies, eurozone nations were forced into a protracted depression.”
There are a lot of things wrong with this kind of thinking, and Krugman is not the first to come up with it. Many US and UK economists think the euro is a bad idea. But to point to Iceland, without ever considering the very specialised nature of its economy and resource endowment, makes little sense. And to talk about exchange rates as the key to competitiveness, without ever mentioning taxation, or skills, or education, or regulation, or infrastructure, or science and technology policy, or telecommunications, or connectivity, or language, or legal systems, or any other factor, is very odd.
The formation of a new populist government in Italy is getting a certain amount of attention from commentators. The Süddeutsche Zeitung outlines growing worries in Brussels and Bonn that the new government will threaten the stability of the EU through questioning its fiscal rules and in particular may hinder further eurozone reforms. The Neue Züricher Zeitung highlights nervousness among Italy’s creditors and the uncertainty over how much confrontation there will be between the new government and Brussels . Le Monde concentrates on the personalities and backgrounds of the two party leaders concerned, but the Wall Street Journal gives it little coverage, saying “European stocks climb as Italy tensions ease for now”. In the UK, the Telegraph has an article headed “As Italy has shown, the euro is a far bigger threat to Europe than Brexit” from a former Conservative party leader and foreign minister. The Financial Times focuses on the potential prime minister of Italy and the constitutional constraints on radical change.
What will happen? Hard to say exactly, but the most unlikely thing of all is for Italy to leave the euro. First of all, Italians, having had the euro, will not want to move to a currency nominally at least under the control of domestic politicians. Secondly, Italy is not in the G-7 by accident: it has a huge range of sophisticated businesses who are well able to see that the costs of leaving would be enormous and well outweigh any benefits.