Italy EMU

HEAD-EMU

Country Analysis

Italy


 

The probability of Italy joining EMU from the start date remains low but the current government is striving to meet this target objective. The people of Italy also seem to be very enthusiastic believing that they stand everything to gain any little to lose.The Italian government has made impressive progress over the past several months as it continues to focus all of its attention upon meeting the Maastricht criteria. Fiscal policy is being tightened considerably. The economic activity appears to be improving to some extent and GDP growth may at least reach 1% compared to 0.8% in 1996. Inflation has been declining to the point that Italy should meet Maastricht Treaty price-stability criteria. Despite Italy’s best efforts, it is unlikely to meet the criteria for the budget deficit as well as the overall debt level in 1997.

Germany and France remain skeptical about Italy and have not been in favor of allowing Italy to join in 1999. This has caused some political tensions within Europe. However, if the criteria needs to be fudged even for Germany and France, some concern has been building about the criteria as a whole. Many fear that allowing Italy to join in the first round would undermine EMU as a whole.

The Italian lira has performed well since it rejoined the ERM back in November 1996. Some optimisim in financial circles has led to many looking upon Italian debt even more favorable than that of France or Germany. Still the current government in Italy is relying upon the support of the hardline Communist Refoundation party in order for it to hold a majority in the lower house. This unquestionably poses political risks for Italy given its fluid political situation.


1995 1996e 1997f
ERM Member N Y Y
Inflation 5.4 3.8 2.5
Budget Deficit / GDP 7.1 6.6 3.7
Debt / GDP 124.9 123.4 123.3
10Y Bond Yields 12.2 9.4 7.6
f=forecast e=estimate

 

© Princeton Economic Institute

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