Does Italy's plight threaten European Monetary Union?

The Italian economy is in a mess. GDP is expected to contract by 0.6% this year and the budget deficit is heading towards 4% of GDP – it is hard to see a way out of the mire. And after the rejection of the European constitution in France and the Netherlands, questions are being asked about the very future of the European project. With Italy fundamentally uncompetitive across a whole range of both price and non‐prices measures, and with an industrial structure ill‐equipped to deal with the challenges of globalisation, Italy's long‐term membership of the Euro is being debated. This article by Keith Church sets out Italy's problems and argues that, if the economy stagnates for a prolonged period, pressure to leave EMU will become irresistible. This can be avoided if the government finally implements structural reforms instead of continually ‘muddling through’. At the same time, the ECB needs to realise the urgency of the current situation and start to show greater flexibility.