Will Italy Drop the Euro?

Yesterday morning, London's Financial Times (FT) skewered Italy in an editorial claiming that Prodi's narrow victory is the worst thing that could have happened to il belpaese, creating a virtual deadlock, and making much-needed economic reforms impossible. The editorialist, Wolfgang Manchau, predicts "international investors to start taking speculative bets on Italy's euro membership within the lifetime of a Prodi government." If Italy is forced to default on its euro-dominated debt, and is unable to adequately service its investors, it could lead to an Argentina-like situation. Manchau's hypothesis imagines Italy leaving the eurozone before 2015. He also cites other major economic problems facing Italy: appreciation of its real exchange rate, rising labor costs, loss of macroeconomic competitiveness, etc. He doesn't liken Italy's problems, however, to France's or Germany's (high unemployment, slow economic growth); he contends rather that Italy's problem is "a lack of readiness for life in monetary union."

L'Unita, a Communist daily writes that FT's reporting "mette fiato nelle trombe", puts air into the trumpets of Berlusconi's Forza Italia party. Alessandra Mussolini (Benito Mussolini's granddaughter) calls the FT article "dead on". The European Union chimes in calling the possibility of Italy leaving the common currency, the eurozone, "impossible".

Prodi comments on FT's article saying "FT is criticizing Berlusconi..." (not me). Nevermind that Manchau wrote: "Mr Prodi offers the wrong kind of reform programme. It consists of of the same supply-side reforms that have failed in other European countries. Since his rag-bag coalition of moderates, socialists and communists will have a wafer-thin majority in the Senate, he may not even be able to deliver on his own insufficient programme. If Italy continues to lose macroeconomic competitveness, a populist movement could well emerge with an agenda for euro withdrawal."

Is Italy blowing in the wrong direction? And if so, will a crosswind come along to billow its sails?