Italy’s Readiness for the 1998 Euro in View of the Country’s Declining Competitiveness

In the 2006 Italian election campaign, then Prime Minister Silvio Berlusconi popularised a widely held view about the negative role of the euro for the Italian economy. This view had initially originated with the secessionist Northern Leagues. More recently, it had come to reflect the view of more moderate political players too. In the campaign Berlusconi ridiculed his contender, and the ultimate victor of the elections, Romano Prodi, for having accepted the ‘unfair Lira pegging’ to the euro in 1998. These claims reflect an ongoing debate about whether the adoption of the euro caused or even significantly contributed to Italy’s loss of economic competitiveness. We will trace the Italian trajectory and its economic preparedness for proposed entry into the EMU. We will weigh whether the terms and conditions of entry predisposed Italy to an inferior economic performance from the outset. We will assess the relative merits of the two interpretations of the role of the euro for Italy since its endorsement of the Maastricht Criteria, agreed to in December 1991. We will also look at the role played by the economic adjustments involved, followed soon after by Italy’s financial crisis in 1992. These latter events ultimately forced Italy to temporarily leave the European Monetary System (EMS). The country re-entered the EMS in 1998. We conclude that Italy’s weaknesses became more obvious with the adherence to conditions required for euro entry, but that its deep-seated political and economic problems were entrenched.