I still haven't seen a good reasoning why the Euro is to blame for the economic problems in southern Europe.
It certainly is a issue that those countries can't devalue their currency anymore, but devaluing is not a miracle cure.
It certainly is a issue that those countries can't devalue their currency anymore, but devaluing is not a miracle cure.
This plot shows the difference between the Italian GDP per capita and the Eurozone average GDP per capita. The vertical blue line marks the day the exchange rates between European currencies were fixed.
One question that has always played on my mind is why these countries find it so much easier to lower their costs via playing games with the currency (e.g. printing more to devalue) than simply lowering prices. Italy could have kept its competitive advantage by simply lowering its wages and export prices, much as Germany has done, but never did.
It also didn't help that when the Euro came in many, many, many shopkeepers repriced 1000 lire = 1€ (basically raising prices by 100%) which although I don't think was tied to GDP issues, it sure caused major pain for normal working folks.
No, it's not. It exposed some structural problems of the economy which could have gone unnoticed for, say, ten or twenty years.
Italy has a very high state spending, which is not matched (as in e.g. Northern countries), by a very high level of state-provided services. The Italian state indebted itself by granting privileges in the 60s, 70s and 80s, notably in form of unsustainable pension, so that today's retired people are getting more money than they gave through taxes, creating more debt.
This gigantic, bloated ship has been kept afloat by devaluating the currency (while we could) and by a high taxation.
And, yes, the taxation level in Italy (red line) is inversely correlated to the increase/decrease of the GDP (in blue).
http://i.imgur.com/0VgdH25.png
On top of that civil justice is painfully slow and uncertain, bureaucracy is rampant, setting up a business requires tens of authorization and months.
> If you ask people on the street the real reason behind Italy's fall is the rise of China, Italy used to have a lot of small manufacturing businesses
I'm not sure about it. An embarrassing number big Italian brands has been sold abroad, so I don't think the dimensions of the business are a factor here.
Italy it's simply no longer a good place to do business. If you can go abroad, you go there. Most new activities I see in my city are restaurants or retailers goods produced elsewhere.
Maybe relevant, this also happened in Spain. 166 pesetas were 1€, but shopkeepers replaced 100 pesetas for 1€ instead.
Traditionally this is compensated by currency fluctuation. The Deutsche Mark rises, cancels German advantage against French exports and the trade balance evens out.
The euro prevents this correction mechanism.
The US largely uses investment flows as a compensation mechanism, mostly via the industrial military complex. Europe has no such military, but must come up with some type of investment flow to counter trade imbalances.
As it is now, we have fines. Germany is in line to be fined for having too much of a trade superavit (idiotic fine, which won't happen anyhow)
There's no political will or consensus to change some of what's wrong in Italy. To be fair, though, it's not easy anywhere, but Italy seems particularly stuck.
Unfortunately , ECB policy keeps pacifying these problems instead of ringing the bell. Devaluation inside or outside the EU has the same effect, the difference is the existence of the ECB.
And one way of subsidizing them was through Euro currency. Bonds of Italy, Greece, Spain, etc. had lower interest rates in Euro that they would have if they were in their own currencies. Many financial institutions had just blindly been buying them as "EU bonds", without paying much attention which country they came from.
The brain drain is very real. Guess where everyone (particularly scientists, and musicians) is going? To Germany.