The financial crisis has faded in Italy but the economic crisis has been growing. There has hardly been a day without news of the credit crunch worsening, and a fall in employment, consumption, production and business confidence. Once again, a European government has misjudged the predictable impact of austerity. Having shown almost no growth for a decade, the Italian economy is lingering in a long and deep recession.
Like the other countries on the eurozone’s southern rim, Italy faces three options. The first is to stay in the euro and take on alone the burden of full adjustment. By this I mean both economic adjustment, in terms of unit labour costs and inflation; and fiscal adjustment. The second is to stay in the eurozone, contingent on shared adjustment between creditor and debtor nations. The third is to leave the euro. Successive Italian governments have tried a fourth option – stay in the euro, focus on short-term fiscal adjustment only and wait.
Since we know from economic history how such episodes end, option four will ultimately lead us back to options one, two or three. My favourite would have been the second: make euro membership conditional on symmetrical adjustment. But Mario Monti, Italy’s prime minister, did not stand up to Angela Merkel. He did not tell the German chancellor that his country’s continued engagement with the single currency would have to depend on a proper banking union with full resolution and deposit insurance capacity; a eurozone bond; and more expansionist economic policies by Berlin. In his interview with the Financial Times last week, Mariano Rajoy, the Spanish prime minister, also demanded symmetrical adjustment – again, rather late, since Germany is already planning an austerity budget for 2014. In view of all political decisions already taken, the option of symmetrical adjustment is slowly receding.