Legacy Debt, Financial Integration, Political Polarization and Economic Divergence: Italy and the Euro

While being both in the first cohort to adopt the common currency, Italy’s and Germany’s economic performance has increasingly diverged since the late 1990s. Germany morphed from the sick man of Europe at the end of the century to its star performer and role model since the Eurozone crisis, while Italy’s anemic growth gave way to accelerated decline and the political rise of euroscepticism to government. This difference is commonly attributed to their different political economies, concluding that Italy needs German-style “structural reforms” and must strictly abide by the common rules imposed by the EMU. We proose a truly systemic approach that explores the externalities that member states travelling on different segments of their growth trajectories impose on one another. This contribution argues that Italy’s sustained effort at reducing its debt while attempting to modernize its industrial production and relations and build a proper welfare state in the decades leading up to Maastricht placed an extraordinary burden on its fiscal policy and made it uniquely vulnerable to the financial speculation that ensued as a consequence of the the Euro crisis in the context of a single market for financial products. It concludes that the microeconomic recommendations contained by the Stability and Growth Pact (SGP) can nothing to solve what are macroeconomic problems.