YEAH, WHO WON'T HAVE FAITH IN THE LIRA?:

No easy escape for nations facing financial crises (JAMES KIRKUP, 6/04/05, The Scotsman)

FOR all the hard work of its founding fathers, there are two ways the young currency could falter and die. One is quick and painful. The other slow and possibly even more agonising.

The most dramatic outcome of a euro crisis would be for one member of the currency union to leave. This would be far more difficult and damaging than Britain's expulsion from the Exchange Rate Mechanism in 1990.

The ties that bind the dozen euro economies would be vastly harder to break. Since 1999, they have intertwined their economies, and especially their government borrowing. Any country leaving the euro area would still have to honour euro-priced debts, but using its new, independent and devalued currency. In effect, the debt burden would get heavier, quickly.

And yet some are starting to ask if a euro country could indeed leave the currency. And that country is Italy.

Italy's economy is in trouble. Unemployment remains high, wage demands are increasing and the government is plunging ever deeper into the red.

The Organisation for Economic Co-operation and Development predicts the Italian economy will shrink 0.6 per cent this year. Even sluggish Germany will probably grow by 0.8 per cent, and Ireland, the star of the eurozone, will expand by 5 per cent.

Of course, the answer for Italy would be to emulate Ireland, but, beyond economic reforms, they'd have to close a significant gap in values.

Posted by Orrin Judd at June 4, 2005 8:33 AM