Devaluation definitely worked for the Italian economy.

This plot shows the difference between the Italian GDP per capita and the Eurozone average GDP per capita. The vertical blue line marks the day the exchange rates between European currencies were fixed.

http://i.imgur.com/mmD8kP7.jpg

That is a fairly stunning graph. Thanks for the data.

One question that has always played on my mind is why these countries find it so much easier to lower their costs via playing games with the currency (e.g. printing more to devalue) than simply lowering prices. Italy could have kept its competitive advantage by simply lowering its wages and export prices, much as Germany has done, but never did.

Lowering wages and prices only works if debt is denominated in the same currency. Otherwise internal devaluation just makes debts harder to pay off.

do you think that the euro is the only reason? If you ask people on the street the real reason behind Italy's fall is the rise of China, Italy used to have a lot of small manufacturing businesses, which are now pretty much gone or dying, and leading to the issues you are seeing with the GDP as well as contributing to the bank problems (small businesses can try to stay afloat with bank loans for a while)

It also didn't help that when the Euro came in many, many, many shopkeepers repriced 1000 lire = 1€ (basically raising prices by 100%) which although I don't think was tied to GDP issues, it sure caused major pain for normal working folks.

> do you think that the euro is the only reason?

No, it's not. It exposed some structural problems of the economy which could have gone unnoticed for, say, ten or twenty years.

Italy has a very high state spending, which is not matched (as in e.g. Northern countries), by a very high level of state-provided services. The Italian state indebted itself by granting privileges in the 60s, 70s and 80s, notably in form of unsustainable pension, so that today's retired people are getting more money than they gave through taxes, creating more debt.

This gigantic, bloated ship has been kept afloat by devaluating the currency (while we could) and by a high taxation.

And, yes, the taxation level in Italy (red line) is inversely correlated to the increase/decrease of the GDP (in blue).

http://i.imgur.com/0VgdH25.png

On top of that civil justice is painfully slow and uncertain, bureaucracy is rampant, setting up a business requires tens of authorization and months.

> If you ask people on the street the real reason behind Italy's fall is the rise of China, Italy used to have a lot of small manufacturing businesses

I'm not sure about it. An embarrassing number big Italian brands has been sold abroad, so I don't think the dimensions of the business are a factor here.

Italy it's simply no longer a good place to do business. If you can go abroad, you go there. Most new activities I see in my city are restaurants or retailers goods produced elsewhere.

>many, many, many shopkeepers repriced 1000 lire = 1€

Maybe relevant, this also happened in Spain. 166 pesetas were 1€, but shopkeepers replaced 100 pesetas for 1€ instead.

That may be the case but why does the change in direction of the graph line up with the Euro so neatly?

Runaway balance of trade deficits and superavits. If a country consistently runs a trade superavit, it will, in infinity, suck all other countries dry of money.

Traditionally this is compensated by currency fluctuation. The Deutsche Mark rises, cancels German advantage against French exports and the trade balance evens out.

The euro prevents this correction mechanism.

The US largely uses investment flows as a compensation mechanism, mostly via the industrial military complex. Europe has no such military, but must come up with some type of investment flow to counter trade imbalances.

As it is now, we have fines. Germany is in line to be fined for having too much of a trade superavit (idiotic fine, which won't happen anyhow)

The big, big, big problem in Italy are pensions. Pension contributions eat 33.4%, before taxes, and this make our companies uncompetitive and lots of the best workers leave. Devaluation would allow to deflate pensions, and make our labor more competitive. Not without lots of other problems, but right now there is practically nothing we can do.

That points to an underlying political problem: the government is unable to deal with pensions directly, and can only cut them by the somewhat underhanded means of inflating/devaluating them away.

There's no political will or consensus to change some of what's wrong in Italy. To be fair, though, it's not easy anywhere, but Italy seems particularly stuck.

I see your point David, but directly cutting pensions (not just the rich pensions, which outrage so many people but in aggregate are little more than a drop in the ocean) is something that would be political suicide for anybody, and I guess not just in Italy.

Blaming the euro masks the real reason that southern economies went south: The reasons are actually outside the EU. The un-competitiveness of the south was subsidized by the EU for decades, and has turned greece , spain and portugal to dependent nations with little innovation. People don't buy the idea that making their labor cheaper will bring prosperity. Instead, they opt to leave their countries in search of better pay, mainly because they can, and are educated enough.

Unfortunately , ECB policy keeps pacifying these problems instead of ringing the bell. Devaluation inside or outside the EU has the same effect, the difference is the existence of the ECB.

>> The un-competitiveness of the south was subsidized by the EU for decades

And one way of subsidizing them was through Euro currency. Bonds of Italy, Greece, Spain, etc. had lower interest rates in Euro that they would have if they were in their own currencies. Many financial institutions had just blindly been buying them as "EU bonds", without paying much attention which country they came from.

> Instead, they opt to leave their countries in search of better pay, mainly because they can, and are educated enough.

The brain drain is very real. Guess where everyone (particularly scientists, and musicians) is going? To Germany.