This article briefly reviews Italy's economic performance and policies prior to European Monetary Union (EMU) membership and, in particular, their reliance on exchange rate depreciations to maintain competitiveness at the cost of accelerating inflation. The tightening of the exchange rate policy following membership in the European Monetary System (EMS) did bring down inflation but also led to the financial and exchange rate crisis of September 1992, with its silver lining of finally spurring adjustment in the public finances. It is now clear that the insistence on nominal convergence only and the consequent focus on the Maastricht criteria detracted from attending sufficiently to needed structural reforms to improve a growth potential that was already faltering. In fact, Italy's potential growth has declined significantly since the mid-1990s to just over 1 per cent a year in this decade entirely as a result of a decline in total factor productivity. This in turn has resulted in a significant appreciation of the real exchange rate of a magnitude comparable to that that led to the 1992 crisis. Similarly, five years of profligate public finances since 2000 have by now undone most of the progress made in the 1990s. Since membership in the euro area precludes the reoccurrence of such a crisis, what will spur adjustment now? The lesson to be drawn for new candidates to euro membership, such as Poland, is to concentrate on structural adjustment and not only on nominal convergence and avoid a dash towards membership.

Keywords: monetary union, monetary policy, Italy, Poland.
JEL: E42, E52, E58, F36

  Massimo Russo, The challenge of European Monetary Union: Lessons from Italy's Experience - plik pdf; (822 KB)