Italy

1
Italy Euro Story of a won Race

• What did Italy gain from joining the European
  Monetary Union
  
• Roberto Piazza

2
The Monetary Union Today
3
1989 Delors Report, preparing the EMU

• Stage One Increased co-operation between central
  banks
  
• Stage Two Establishment of the ESCB
• Stage Three Fixed exchange rates between
  national currencies and their replacement by a
  single European currency.
  

4
1993 Maastricht Treaty, the Rules of the Game

• Inflation must not exceed by more than 1.5 that
  of low inflation countries.
  
• Deficit/GDP ratio lower than 3.
• Cumulative Public Debt/GDP ratio converging to
  60.

5
3 May 1998 The Day of The Exam

• Heads of State and Government decide which
  States fulfill convergence criteria and would
  take part in the euro from 1 January 1999.

6
1993 Italy at the Starting Line

• Excess Inflation (limit 1.5)
• 3,1
• Deficit/GDP (limit 3)
• 9.5
• Debt/GDP (limit 60)
• 120

7
1993-1998 Studying Hard to Pass The Exam

• First Criterium Convergence in Inflation

8
Convergence in InflationDONE!
9
Which are the effects of high Inflation?

• Prices change a lot, choices become very
  uncertain.
  
• Some goods become relatively more expensive than
  others, some people gain, some people loose
  uncontrolled wealth redistribution.
  
• Value of Money is lower, currency is weaker,
  goods becomes chepear to EXPORTS!
  

Disadvantage
Disadvantage
Advantage
10
What Italy lost because of reduced inflation
11
1993-1998 Studying Hard to Pass The Exam

• Second Criterium Deficit/GDP Ratio
• Deficit For a given year, government spending in
  excess of taxes collected.
  
• GDP Income of a country for a given year.

12
Convergence in Deficit/GdpDONE!
13
How was deficit reduced?

• Higher taxes
• Lower Government Spending

14
1993-1998 Studying Hard to Pass The Exam

• Third Criterium Debt/GDP Ratio
• Public Debt Accumulated Deficit, total money
  that Government owes to lenders

15
Convergence Debt/Gdp? ALMOST!
16
Italy wins the race 1 January 1999 Birth of the
uro
17
What did Italy gain from EURO?

• Huge reduction in Interest Rate! From 9 to 0.2

18
Why Iterest Rates Converged?

• Interest Rates between Debt in Lira and in Mark
  related by
  
• iIt - iGerChange in Exchange RateLira/Mark
• (Example if Lira Depreciates with respect to
  Mark, its less valuable to invest in Lira, so
  higher iIt needed)
  
• With unique currency, EURO, Exchange Rate is
  Fixed
  
• iIt iGer

19
Why Interest Rate Reduction is Important?

• Suppose you have 100 debt, and interest rate is
  9 per year. After 10 years debt is
  
• 100(19)10 236
• If the interest rate is 1, after 10 years debt
  is
  
• 100(11)10 110

20
Why Interest Rate Reduction is Important?

• Italys Public Debt is Huge
• 2 trillion dollars (110 GDP)
• With interest rate of 1 instead of 9 Italian
  Government saves in 10 years
  
• 2(19)10- 2(11)10

1 trillion dollars
21
Conclusion Overall a Success

• Italy Succeded in meeting Maastricht criteria.
• Adjustment was painfull Increased Taxes, Public
  Budget Cuts.
  
• Italian Macroeconomic Variables (Inflation,
  Interest Rate, Deficit/Gdp) have converged to
  those of strong European Economies.

22
Conclusion Overall a Success

• Italy has lost competitivness in Exporting.
• Italy has stabilized Public Finances through
  interest rate reduction.