Thread by @nicktolhurst

1. There seems to be a lot of talk (both from the right & left) that Italy should/must/will leave the Euro.

Here's a little thread explaining why in any sane world this wont happen.

2. When Italy joined Euro its Govt debt service costs dropped from 12% to 5% of GDP and inflation fell. This is massive

Unlikely as the fact may strike you Italy benefitted greatly from this.

So why is there a problem & why the talk of leaving the euro?

theguardian.com/business/2018/…

3. Unfortunately like Greece, rather than using extra money liberatted from saving on debt service to slowly reduce its debts, Italy used this benefit to just borrow more cheaply.

This was relatively OK while world economy fine but when global crisis hit, Italy had no buffer.

4. So what happens if Italy leaves Euro? Unlike Greece most debt held by Italians.
Leaving the Euro means instant devaluation devastating Italain savings - making it more costly for Govt to borrow too.

5. A new Lira will be worth less, inflation must thus go up, Govt finances worse, if debt donomiated in Euros Italy essentially bankrupt if debt denominated in New Lira Italians savings collapse.

But its worse even than that...

6. ...as its impossible to leave a currency area "just like that" - it takes time. Thus before any chageover every person or entity with any money held in Euros in Italy will simply take them out of the country. With no money all Italian banks collapse....

7...but its actually worse than that...before any changeover, with Italian bank collapsing, nobody will trade with Italy without guarantees business is in euros (not any New Lira) as logical assumption is New Lira will be lower than Euro (otherwise why leave Euro?) which means...

8. ...Italian trade collapses.
So to recap:
Savings collapse or debt rises as weaker New Lira to replace Euro. During changeover capital flight = bank collapse. Trade done in Euros making imports too expensive and trade silts up.
Only choice for Italy then would be return to....

9. ...Italy returns to simple foreign exchange generating industry with lower currency such as tourism or cheap non supply chain goods (ie simpler process).

This is effectively a return to the 1960s style economy based on devaluation & forex.
It would effectively make Italy.....

10. ....Italy wld become something like Greece or N Africa economy based on tourism and say textiles & agrculture to generate forex.

No advanced country could possibly consider this strategy outside a war ot similar crisis.

11. So why is there talk of Italy euro exit?

2 reasons - 1 made in Italy & 1 made abroad.

#Brexit folk are talking up Italian crisis to add a sheen of sense to brexit disaster, while in Italy talking tough on Euro is seen as a way to leverage more reflation from ECB/N Europe...

12. Italy may just get a bit of solidarity sympathy to jigg up reflation & more banking solidarity but beyond that rest of EU know Italy not serious about euro exit. Its a political tool not an economic one.

Which is why I can confidently predict that...

13....Italy will remain in the euro no matter how much political instability there is. Indeed the very instability means a currency changever would be even more disastrous.

It just aint going to happen, but Italy's problems will continue until it sorts them out - itself.

/ENDS.