Many like to compare the euro to a marriage: one that has no divorce. But everyone says ’till death us do part’ and still there are divorces. So the analogy is not a good one.

But following it further, what is the time scale for the separation after one of the partners recognises the relationship isn’t working. Hard to say, but normally a protracted period of arguing and making-up is necessary. Things will be the same here.

I have no doubt: one day Italy *will* default. You yourself say in another comment:

“It means that there’s no fiscal policy either. We have an interest rate ill fitting everybody, no way to devaluate, no fiscal policy for the whole currency area and common market rules that in tendency hinder national fiscal policies”

Italy cannot manufacture many of its own products anything like as cheaply as it can import them. This is disastrous, but it can effectively do little about this. If it cuts spending, it can only go into deeper recession. There is no way out. The deficit will continue to rise (as a %of GDP) till the interest rates associated with maintaining it make it impossible to sustain.

So when do the partners separate, and the default come: when they can no longer tolerate living together, and feel they must part, and when the markets see this will happen. At present the markets are pricing in a 5% risk. We have some way to go.

Meantime Italy will probably play the role of the ‘unfaithful husband’, simply waiting for the wife to kick him out.

“then spending cuts now are needless suffering”.

Many of them will realise this.

This is contradictory. How likely is it that Italy is exactly on the brink? If a default is really necessary, then spending cuts now are needless suffering.

I would favour looser monetary policy for “less developed” EU states / regions. Southern Italy, Portugal, the new EU states in Central Europe, East Germany are all candidates that spring to mind. It would need to be agreed at the outset what the parameters were, and how it would be monitored so as not to provide an excuse for profilgate government. Such a policy might also ease pressure on the EU budget, mean fewer recriminations about freeloaders, and it would reflect a more humane approach than the one that currently seems to say something along the lines of “you’ve breached the rules of the G&S Pact - adopt austerity measures no matter how unpopular they are”.

The fact is that the French and Germans basically said “we are too important to follow the rules”, and so bust the stability pact. The Commission really has no credible sanction.

There is an attempt to try to apply the new SP rules, in launching the excessive deficit procedure against Italy - but as many pointed out, it really is a lose-lose position for the Commission:

Either we force big cuts and we get the blame for Italy’s mess (Berlusconi and others playing this game already), or we don’t - in which case the pact is truly dead and buried and the Commission is a complete paper tiger.

And if we don’t apply the SP - the political signal would be that (once again) there seem to be different sets of rules for big and small, and that rules only apply to the big member states when convenient. A signal the Commission doesn’t want to give.

Looser monetary policy might help - but how much lower can the ECB go? And the ECB is reluctant to be seen to be taking instructions from politicians who they see as unwilling to undertake necessary reforms, and looking for a quick fix.

This is simply impossible, the demographics don’t permit it. Italy has already spent 106% of GDP getting itself into recession. More spending isn’t the answer. This being said, short of having a default and a major crisis, there may not be an answer for Italy.

I mean, Argentina now seems to be getting over the worst of it.

Isn’t this what the Italians are pushing for ?

And would it indeed be a serious problem for the Euro ? After all, the usual complaint is lack of growth in the Euro area.

“What the EU is enforcing is not compulsory, it simply entails a logic budgetary measure, following the markets. What I don’t agree with are not the figures included in the EU report, but their interpretation. We can discuss this”, said Economy Minister Domenico Siniscalco on Repubblica Radio. Siniscalco also commented the possibility of quitting the euro. “Without the euro, Italy’s debt interest was over 5 pct, and now it would be twice as much. We would have to face much stronger currencies. The result would be paying much more. From an economic point of view we would be worse off, since we’d have to pay a much higher debt interest rate”.

http://www.agi.it/english/news.pl?doc=200506081659-1175-RT1-CRO-0-NF82&page=0&id=agionline-eng.italyonline

So what he is doing is threatening to stay, not threatening to leave. Threatening to stay, and play the ‘free rider’ game. Berlusconi stays in the background, and then if this doesn’t work, out comes Maroni, threatening to leave.

Really I don’t think political life in other EU states hasn’t prepared people to play this game so well.

Incidentally, this is another argument he has in his back pocket, just in case he needs it:

“He added that the decision to take an additional measure “shouldn’t be made by the EU Commission but by a sovereign State”. “I don’t think that in the current macroeconomic situation, we should reduce spending even further in 2005. It wouldn’t be the right way to solve our country’s problems”"

http://www.agi.it/english/news.pl?doc=200506071854-1257-RT1-CRO-0-NF82&page=0&id=agionline-eng.italyonline

I think he’s got them the way Gene Hackman had hold of someone in Missisipi Burning.

And yes, they could become creative. And this is unlikely to do what you want. What eg. do you do if they simply don’t pay the fine?