The East-German mark was wildly overvalued (at 1:1 compared to the West-German mark) after unification. I think (as in: don’t really know for sure at all) this was probably more damaging than the claimed overvaluation of the DM in the EMU. East-Germans would have been better of if their wages were competitive compared to the rest of Eastern Europe.

And it’s more comparable to the subject at hand: Italy also has two economies that really ought to have two sets of wages and benefits, one for the North and one for the South. This means that (uncompetitively) high paid jobs from the North can move South as well as abroad.

It will, however, mean one more possibility for Italians to cheat on benefits.

You’re obviously right here. Everyone heads to the bank to trade their scrip for real euro notes, and then proceeds to stuff them into their mattresses.

Of course Robert could be right, the fact that it won’t work doesn’t necessarily stop people trying.

(Funny thing, among yuppies here in Spain having cash is definitely out, so how ‘un-you’ for them to have to go the local bank branch with a wheelbarrow to get hold of the notes.)

This would be the the Stamp Scrip idea once favouyred by Irving Fisher.

http://userpage.fu-berlin.de/~roehrigw/fisher/

Funnily enough it was invented by a German living in Argentina, and the idea was widely used during the Argentine financial crisis.

“Silvio Gesell, who died recently, was a German business man and quasi-economist. He lived in Argentina and wrote some of his many papers in the Spanish language. In 1890 while in Argentina, he proposed essentially that particular substitute for money which now bids fair to sweep this country, under the name of “Stamp Scrip.”"
Irving Fisher

I agree Robert that what the ‘liga’ is up to is far from clear. Berlusconi finally surfaced yesterday to say that Italy couldn’t leave EMU (what is this, three weeks later). Not everything in Italy is transparent, and my feeling is that Berlusconi uses the Liga and uses Fini when he needs someone to do or say something he can’t publicly do himself. So who knows what lies behind all this. Some attempt at a hybrid system may be introduced at some stage though.

“Zero wage growth and the like. It’s taken a while, but it’s paying off, in terms of competitiveness.”

Zero wage growth can only work if you have inflation, if you are in a deflation recession you need cuts, and meaty ones. That would be the first point.

Then there is the question of whether this has worked in Germany or not. On the supply side it certainly has. The German company is now highly efficient, and can seemingly beat the pants off eg its US rivals in the highly competitive export markets. But again we are seeing the weakness of excessive ’suppply side’ obsessions, since Germany is not pulling out of the dolldrums, there is no life in internal consumption. This is a side effect of the deflation that has been applied to wages. Remember that stomach medicine you took that gave you back ache? Well in economics, sometimes things are like that too, and sometimes the side effects are worse than the original problem.

“it will be forced upon them (the Italians) brutally by a new interest rate differential for their debt.”

This is what we are expecting, I guess a lot depends here on how the SPG is applied. If it isn’t, then this means that the rest of thge member states effectively guarantee Italy’s debts, and there is no reason to expect the yield band to widen greatly. Of course this won’t get Italy out of recession, or stop the importas coming in.

If they don’t do it on their own, it will be forced upon them (the Italians) brutally by a new interest rate differential for their debt.

Two legal currencies side by side? Sounds rather “gresham-like” to me…bad money drives out good.

This factor makes me think there might be some policy behind the Northern League’s referendum to go to a dual-currency system, beyond blind populism.

Let’s imagine an Italy where Italians are paid wages in lira, and use lira for most of their consumption, while the state continues to use euros as the official currency and for its internal finances, and firms carry on foreign trade in euros.

Let’s also posit that the lira is softer than the euro.

This setup lets Italy devalue without officially leaving the EMU. Which in turn acts as an effective across-the-board protective tariff, protecting internal demand for its traditional low-value manufacturing industries.

Given that Italy imports 80% of its energy, devaluation by any means would be painful, and propping up what are becoming commodity industries seems like a short-sighted development policy, but maybe there is a method to what otherwise seems like madness.

In France the early eighties, Delors initiated, measures are still called les r?formes honteuses. I just don?t see where the political will to embark on such a programme and pay the heavy political cost is going to come from in Italy ? but I don?t see an alternative either. Do people here believe Prodi has the ? vision? And as Otto says, can the Italian unions be persuaded?

Europe is quite a useful excuse in such circumstances, as a leader of the Patronat and Sarkozy ally explains here; http://www.lexpansion.com/art/6.0.59165.0.html

Edward, I get the impression that in Greece, it?s not just little start-ups that don?t issue receipts. The Government is targeting ?merchants, manufacturers, doctors and industrialists?. The idea that the proposed scheme - getting ordinary taxpayers to come up with receipts totalling ?4000 in order to qualify for tax entitlements - will actually make a difference indicates the scale of the problem. Are we getting an equally distorted picture of economic activity in Italy?

Of course, I entirely agree, pay restraint can work, and I’m not so skeptical as Otto that the Italian unions couldn’t deliver something, but it’s the order of magnitude that is striking: Guzzo talks about 25%. This is big as a wage cut. And the problem is only partly the value of the euro, on the other side is the kind of manufacturing activity Italy engages in, it has a profile which is very at risk from the arrival of the ‘new global competitors’. It would need to adapt downwards wherever the euro was.

It also sounds like the Netherlands in the early 80s. From the Economist:In 1982 representatives of business and trade unions (the unions’ leader at the time being the durable Mr Kok) signed an accord in a suburb of The Hague called Wassenaar. Under this accord, later endorsed by the government, the unions promised to deliver pay restraint, including more decentralised wage bargaining, in exchange for a new emphasis on jobs. For its part, the government undertook to sort out its fiscal mess and to lower taxes. The Wassenaar accord laid the foundations for the economic renaissance of the late 1980s and 1990s, when the talk turned from Dutch disease to Dutch miracle.Pay restraint (and belt-tightning in general) can work. I have no idea under what circumstances it’s a good idea, and when it’s an horrendous idea.