Also inner European labour mobility is now much higher than it used to be a generation ago.

ps i’m italian, although a german resident. if you wish, i could gladly help you somehow with italian political situation.

Ok. But we at least have a consensus that the US shoul be reducing the current deficit, and at some stage, even if this be under the next presidency, there is some expectation and hope that this will happen.

Perhaps the words ‘pay off’ were ill chosen. I mean obviously any national government will have some sort of debt, and no-one is expecting that this is ever paid off completely.

The point is when the debt rises as a % of GDP and there is no end to this process in sight. The latest version of the stability and growth pact sets a target of 60% of GDP and this seems eminently reasonable. This then allows for the transitory expansion of the debt in bad times, or difficult demographic moments, and the subsequent paying down in better periods.

But this doesn’t seem to be the case with Italy. There is no evidence of any commitment or intention in this regard. The deficit as a % of GDP may well then just grow and grow, and this is the problem. This is what is not sustainable.

In Italy’s case the situation is even more problematic than most since during the coming decade (and possibly beyond) Italian GDP growth is going at least to be weak and may even turn slightly negative (assuming that there is no ‘crisis’ in finances which would of course only make a bad situation worse).

“Similarly, Europe doesn´t have anything approximating “big government” in Brussels yet.”

Well yes, I think this is an important point. And last year’s votes on the constitution mean that this is a situation we may well have to learn to live with for some time to come. This is one of the ‘facts’ of the situation. A given.

“Similarly, in case of an emergency, Europe will have to kind of “de-nationalize” (“europeanize”) Italian debt.”

Again, well yes. In fact I would go even further, for the eurosystem to survive Europe will have to denationalise itself completely. I am ready for that, but I have the strong impression that the majority of my fellow citizens are not convinced of the need for or desireability of this (and the best and most recent example is the debate about ‘national champions’).

Charly also says this:

“Belgium has the Flanders/Walon problem”

Well, as they say, this isn’t part of the problem, this is part of the solution. Lets get rid of Belgium. Then lets get rid of France, Germany, Spain, Italy etc. People aren’t ready for this many will say (they just did in the referendums). Well then they aren’t ready for the euro I say. This is my whole point of view. The labour mobility issue is a side problem. We have a national champions mobility issue to address first. What we need isn’t just labour mobility it is mobility (mental mobility, flexibilisation, not just of labour markets but of everything, especially of feelings up an abstraction notch) tout court. We are living in the past, not in the future.

Again this is why I back the Catalans with their statute (although, please note, they are the ones who are the most furious about the Eon takeover bid, Gas Natural/Endesa was supposed to become the first ‘champion’ for the new nation. Here I have little sympathy). Basically I agree with what Robert said in some earlier comments (the Toglodytes Making Waves post): what the hell if some US county really wanted to create its own ‘state’. The irony is that so many who argue the pro-euro case like to cite the US as a role model of how the euro is supposed to work. The US is *not* composed of nations, it is composed of states, and these states are administrative units.

I think this thread is fascinating, for the issues it raises. I think the point about Munchau’s article is that he has a point of view, but that he and Nouriel are also opening a debate. Daniel Gros likewise:

http://ceps01.link.be/Staff.php?staff_id=14&researcher=1&

See also the Ceps publications that can be linked to from this page:

http://ceps01.link.be/Default.php

Joaquim Fels would be another ‘node’ here:

http://www.morganstanley.com/GEFdata/digests/20050419-tue.html#anchor0

http://www.morganstanley.com/GEFdata/digests/20050531-tue.html#anchor1

For an intelligent pro-Euro view see Paul De Grauwe (various articles and papers across his site):

http://www.econ.kuleuven.be/ew/academic/intecon/Degrauwe/

The point is that for the first time we can really see the possibility of a rational discussion of the pros and cons of the euro. Of course people have differing points of view. This is healthy. What is important is that everyone can state their views clearly, without an emotive slanging match where people simply restate their prejudices. We will only get to see who is right as the situation unfolds.

“One of the things I think that Edward is trying to wrap his mind around is how much disorder Italy’s fiscal problems are going to cause; will that be enough to bounce the country from the euro-zone; what are the consequences if it is not”

This is the core of the situation. Basically I think the 90s interest rate convergence was posited on a point John made earlier:

“Or as Italian banker Corrado Passera said “The euro is the instrument through which an undisciplined country like ours benefits from interest rates such as those one finds in the disciplined countries”"

The question is whether the ECB or the Bundesbank will withdraw the support and guarantees that have made this possible. This is Nouriel’s ‘blinking’ argument.

Charly:

“Paying a real interest rate of 3% on it doesn’t sound to difficult to me and i doubt it will ever be that high as long as we don’t get into deflation.”

Well there are several assumptions here, the issue is whether those assumptions are well-founded. This we will only get to know going forward….as the song says “the future’s not ours to see, que sera, sera”.

You have a legitimate point of view. Let the debate continue!

Actually, by Jan of 1998, the introduction of the euro was a completely done deal from the point of view of the governments and the financial markets. This is a point that I have made to Bob B on numerous occasions, whenever he brings up the German economists’ plea for an “orderly delay.” At that phase, the parties involved were so strongly committed to monetary union that you could have order, or you could have delay, but you could not have both. (One of the things I think that Edward is trying to wrap his mind around is how much disorder Italy’s fiscal problems are going to cause; will that be enough to bounce the country from the euro-zone; what are the consequences if it is not)

The lock-step movement was pretty thoroughly entrenched by at least March of ’96. That was when I took a job in the financial sector and started watching these things on a daily basis. I don’t know in any great detail how long it was in place before that. My impression was that the first few years of Miterrand (’81-’83, say) had convinced the French establishment that fiscal and monetary policies significantly at odds with those across the Rhine were folly.

The question of whether a country has interest rates that are perfect for its present situation is not the only question related to monetary union. (And indeed, having a national central bank is no guarantee that a country will have perfectly suited interest rates, infallibility being a scarce good even among central bankers.) The question going in is whether the acknowledged costs are worth the benefits that accrue. On the other hand, if a country (and for country, read policy-makers, interested parties and opinion leaders) spends much of its time debating whether or not joining is a good idea, it’s likely to lose credibility on actually making the project work. This is one of the UK’s long-term liabilities in the Union as a whole, of course. But this has taken us a long way from Italy’s issues.

About longterm Italian debt:
Sadly Italy is known for the fact that everybody pays their taxes but if that wasn’t the case than i would sell longterm debt and promise that anybody caught with undeclared money wouldn’t have to pay a fine over money they hold in longterm Italian bonds as ;long as they can proof that they own it for more than two years.

ps. I assume that the longterm italian debt plan is not in accordence with EU rules but there are ways around it especially when it is also in the interest of the EU

This was a fairly common argument in 1998 or so, and I think some people thiought of it as a major argument in favor of the euro, rather than a marginal one or a quip – it’s great as a quip.

In the 90s countries had largely the interst rate that was right for them. EMU means they almost never will. Secondly, there was nothing that would have stopped them from responding to a sudden major downturn (or upturn).