Economics: Would It Be So Bad If Italy Leaves The Euro Zone?

(Drivebycuriosity) - The international financial markets are in a turmoil again. Speculators are responding to the political crisis in Italy. They imagine that Italy eventually might leave the Euro Zone. Would it be so bad if Italy really gives up the Euro?

It was a bad idea in the first place to give countries like Germany, France, Italy, Spain & Greece one common currency. Already in the 1960s economists, including Robert Mundell & Ronald McKinnon, developed a theory of optimum currency areas. According to them countries which have a similar economic structure (job markets, prices, growth and more) should have a common currency which would encourage trade & economic growth there, countries which are dissimilar should not join this currency area. They got ignored. Instead politicians put a patchwork of very different countries under a common currency roof, the Euro. But Germany, Italy, Spain & Greece don´t form an optimal currency area. These countries are not comparable to the federal states of the US. They are too different. They don`t have a common government, there is no common economic policy and there are lot others differences. Today the centrifugal powers, including different economic growth and jobless rates, are stressing the Euro area.

I think Italy would be better off if the country leaves the Euro zone and will have her own currency, maybe the Lira again. In this case Italy could devalue the Lira, maybe 30% or more. Italian products (exports) would get much cheaper on the global markets. Italian producers would become much more competitive and could export & produce more. Italy also could reduce her interest rates below the general level in the Euro zone, meaning higher negative interest rates. Both steps would rekindle economic growth and could kickstart the ailing Italian economy.