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Lately it is easy to find news about the relation between Italy and the Euro – for example this one: “Italy’s love affair with the euro is due to cool” ([http://timesonline.typepad.com/irwin_stelzer/2006/05/italys_love_aff.html]) Italy seems to be struggling with the euro and with its own economy. It appears to be the case that the Italian economy is especially vulnerable for the global markets in which it operates – shoes, leather and equipment; threads come especially from East Asian countries that offer low cost alternatives.

The economic system behind the Euro has taken some of the (political) independency away from the member states. For one, only the European Central bank in Frankfurt is able to change interest rates. Fiscal policy is the steering mechanism that is remains in the hands of the individual countries. Fiscal policies (for example government spending) however have mostly a long term effect, whereas interest rate changes or the more drastic devaluations have an immediate effect.

Italy was one of the countries that ‘used’ the devaluation mechanism in the previous monetary systems (The EMS) to revitalize its economy. With the Euro the devaluations are no longer possible, because there is no local currency anymore. Italy could choose to leave the Euro, but that would be – if at all feasible – a sign of weakness. The UK that has chosen not to enter the Euro has a much stronger position – It could always join the Euro, if it pleases.

For a well functioning monetary system, the fiscal policy requires some balance. The fiscal policy that has been designed for this matter prescribes that the governmental budget deficit remains below three percent.

Italy has not been able to comply with this restriction for more than one year and recently the rating institute Standards & Poor has declined Italy’s credit rating — S&P Delivers a Downgrade, Italian-Style (http://www.businessweek.com/investor/content/oct2006/pi20061020_024567.htm) –

Now there are voices that Italy should or would want to leave the euro (system). But that is to easy to imagine.

The Euro and the politics behind it, constitute a cooperative system. There are central rules — deficits below 3% , a central interest rate, etc — and there is space for individual members to control their own economy, but within the boundaries of the central policy.

In the first few years of the Euro and the European Union there have been mainly positive developments and feedback about the system. The politicians where busy with the extension of the European union with even more countries. Last year with the constitutional developments of the European Union, the first negative sounds (The Dutch and French ‘NO’) where heard. “Today,” we learn more about a difficult case like Italy.

In fact this negative news is positive for the European development – how strange it might sound.

At least people start to understand that the core of the union should function well before it could be extended. To fortalice the Euro and the European union it is important that there rises some more resistance and problems. It is just like puberty; you just have to go trough it in order to grow (up).

Of course the Italian issue can easily be solved, as long as we — Europeans — want to. Attention for problems however is the first step in this process. The market can help this process — S & P already downgraded Italy. That is a healthy sign which we — Italy, Europe, European citizens — should be able to cope with.

As long as we do not forget that any system requires commitment. And the level of commitment becomes clear when the problems — in a project or operation — arise.

© 2006 Hans Bool

Hans Bool is the founder of Astor White a traditional management consulting company that offers online management tools. Have a look at some of our free management tools

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