S&P Wakes Up, Cuts Italy to One Notch Above Junk | Wolf Street.
Italy has one of the most troubled economies in the EU. Businesses and individuals are buckling under confiscatory taxes that everyone is feverishly trying to dodge. Banks are stuffed with non-performing loans that have jumped 20% from a year ago. The economy is crumbling under an immense burden of government debt that, unlike Japan, Italy cannot slough off the easy way by devaluing its own currency and stirring up a big bout of inflation – because it doesn’t have its own currency.
Devaluation and inflation used to be Italy’s favorite methods of dealing with its economic problems. It went like this: Politicians made promises that they knew couldn’t be kept but that bought a lot of votes. When everything ground down as industries were getting hammered by competition from across the border, the government stirred up inflation, and then over some weekend, the lira would be devalued. It was bitter medicine. It was painful. It didn’t even cure anything. It impoverished the people. But it temporarily made Italy competitive with its neighbors once again.
Most recently, Italy devalued in 1990 and then again 1992 against the European Exchange Rate Mechanism, a predecessor to the euro. Having to take this bitter medicine time and again had made Italians the most eager to adopt the euro. The idea of a currency that would be out of reach of politicians and that would function as a reliable store of value, run by the Germans as if it were the mark, and in turn, keep politicians honest – all that seemed like paradise.
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