Why the Euro Can’t Afford to Lose Italy

November 20th, 2011 at 1:16 am | 11 Comments |

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No relationship in Europe is more complex or dangerous than the relationship between the EU and the Eurozone.

The EU contains 27 countries. Only 17 of them use the Euro.

The economic impact of the Euro on non-Euro countries is obvious. Now consider the political effect.

Current voting rules in the Council of the European Union (Council of Ministers) requires representatives of 62% of the member states’ population to enact legislation, medical and this will go up to 65% in 2014. Today’s eurozone represents 66% of the Union’s population. Without Greece, that number is about 64%. Without Italy, that number drops to about 54%.

The Treaties of Amsterdam and Nice greatly expanded the policy areas that could be decided by qualified majority to more traditional home matters, such as industrial policy, social policy, commercial policy, immigration and citizenship policy, external policy as it relates to the common currency, and certain aspects of the Common Foreign and Security Policy.

There are so many reasons for the eurozone to strenuously try to preserve Italy’s status as a eurozone country: the relatively huge scale of its economy and difficulties, its commitment to the euro and the Union over time, its new Prime Minister, himself a former and highly respected Union official, and its role in the existential crisis the euro itself currently faces. But its indispensability as a member in a future qualified majority creating bloc cannot be ignored.

It would be a normal, and under the rules legal, for certain changes inside the deeply integrated eurozone to be imposed across the entire Union. Without Italy, barring the addition of several more countries to equalize the loss in represented population, those changes will likely stay just within the eurozone, further exacerbating the differences between the two blocs–the eurozone and everyone else.

Recent Posts by Jeff Cimbalo

11 Comments so far ↓

  • Bingham

    yes, ma’am.

  • hisgirlfriday

    OK I am incredibly interested in this eurozone stuff but even I find this column boring. Sorry Jeff.

    Would much rather hear your thoughts on the interesting row developing after German lawmakers leaked details of Ireland’s budget before Ireland’s TDs even had a chance to see it causing huge embarrassment for Enda Kenny. Will be interesting if anyone in Europe is going to stand up to Germany after how badly that went for Papandraeou.

    Perhaps they will take inspiration from Alabama’s stand against German invasion ;)
    “Immigration law: Mercedes manager from Germany arrested in Alabama”

  • ottovbvs

    In trying to preserve the Eurozone I somehow don’t think voting balances in the wider EU loom particularly large in the thinking of Merkel, Sarkozy and co. It’s somewhat akin to suggesting passengers getting into a lifeboat are going to be concerned about the ethnic and gender makeup of their fellow survivors. Not that there is any chance of Italy leaving the Euro, only last week the Eurozone parachuted a supreme Eurocrat into the Italian premiership so that the Italians could get their act together. Ditto Greece. As Jean Monnet one of the founders of the EU pointed out people accept things when they realize there is no alternative. In fact the more I’ve read about how this crisis has unfolded over the last two weeks the more convinced I’ve become that it is ultimately going to prove a catalyst for much greater economic and political convergence between the members of the zone and ultimately the wider EU.

    • Traveler

      I concur, but the collapsing bond market will make recovery that much harder. Rates are going nuts as fear spreads. I think the long term prospects are much better, and Corzine will eventually be proven right, but there will be blood before that happens.

      “The hope is that reform (and high yields) will tempt buyers back into Italian bonds and that markets will calm down….As much as reform in Italy and elsewhere is needed, it seems unlikely that promises to be austere will halt what looks like a run from all euro-zone bonds but German ones. The ECB, despite its misgivings, is the only institution with the power to reverse a self-fulfilling panic. ” http://www.economist.com/node/21538753

      “German orthodoxy ignores the possibility that rising bond yields are being driven by a self-fulfilling panic in financial markets. Investors who once regarded Italian bonds as a safe asset now worry about everything from the integrity of the credit-default-swap market to a possible break-up of the single currency. The result is a stampede for the exit, which cannot be stopped by Italian policy reforms alone. So by adding to the pressure on the governments of countries in crisis, the Germans and their allies succeed in forcing reform, but at the cost of making it far harder to rescue the euro.” http://www.economist.com/node/21538755

      Not that the Germans had much choice in how structural reform in the PIIGS got done. But it looks like it got done finally. Now they have to step up, and Merkel is leading them along by the nose, bit by bit. They will have to backstop the ECB, much as the Bundesbank doesn’t seem to want to. Once they realize their markets will evaporate if they don’t, then we will see the Germans come to the table.

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