EMU and the Italian debt problem: destabilising periphery or destabilising the periphery?

While during the first decade the common currency helped stabilise the Italian economy by overcoming political constraints that blocked debt reduction, during its second decade the euro has rather served to destabilise the country politically and economically. The combination of a single currency and a single market in financial services turned into an engine of massive macroeconomic imbalances that came to a head in a typical sudden stop in the years following 2009. While Italy had steered clear of the financial imbalances of the southern periphery during the first decade of EMU, its debt legacy problem, despite continuous primary surpluses, made it a target for financial contagion during the second. The EU’s recipe of austerity and structural reform exacerbated the problem thus reversing the long-term trend of falling debt to GDP ratios and handing an electoral victory to populist Euro-sceptics by a public that increasingly came to see the EU as a threat to prosperity and social inclusion.