Paper by Marcel Fratzscher, Livio Stracca (ECB)
There is a broad consensus that the quality of the political system and its institutions are fundamental for a country’s prosperity. The paper focuses on olitical events in Italy over the past 35 years and asks whether the adoption of the euro in 1999 has helped insulate Italy’s financial markets from the adverse consequences of its traditionally unstable political system. We find that important political events have exerted a statistically and economically significant effect on Italy’s financial markets throughout the 1970s, 1980s and 1990s. The introduction of the euro appears to have indeed played a major role in insulating financial markets from such adverse shocks. The findings of the paper therefore suggest another important economic dimension and channel through which Italy may have been affected by EMU. Our analysis could also be potentially interesting for other countries with weak institutions considering adopting a currency based on stronger institutions.
Does it Pay to Have the Euro? Italy’s Politics and Financial Markets under the Lira and the Euro.
Yes and No:
The main implication of our study is that, to the extent that Italy remains a politically unstable country (at least in comparison with other advanced countries), the euro may be protecting Italy from the fallout of its own political instability, and that this should be ascribed as an important positive contribution of the introduction of the euro in Italy. On the other hand, this may also imply a lower responsiveness of asset prices to domestic events, which may reduce the disciplining role of financial markets on politicians.
“the disciplining role of financial markets on politicians”
if only.