Robert Mundell, the man who laid the groundwork for the establishment of the Euro claims Italy is a bigger threat to EU stability than Greece.

Please consider Italy Is Top Threat to Euro, Columbia’s Mundell Says

Italy, saddled with the euro region’s second-largest debt, is the “biggest threat” to the economy of the 16-member bloc, according to Nobel Prize-winning economist Robert Mundell.

“Italy has got to be worried,” Mundell, a professor at Columbia University, said today in a television interview in New York. “If Italy became a target then this would create a big problem for the euro. Whatever is being done to Greece, possibly to Portugal and maybe Ireland, has to also save Italy from that problem.”

Italian officials have tried to prevent Italy from being lumped together with some of the euro zone’s smaller economies – – Portugal, Ireland, Greece and Spain — that have drawn investor concern about their ability to control deficits and debt. Italian Prime Minister Silvio Berlusconi said Feb. 10 that those nations were doing “much worse” than Italy and that the “markets have given us their faith.”

“It would be very difficult if Italy got tarnished with the same problem,” Mundell said, referring to the risk the European Union may need to provide financial assistance to some of its members. “It would be very difficult to bail out Italy.”

Mundell won the Nobel Prize in 1999 for research that helped lay the foundation for Europe’s single currency.

Italy’s high debt level would create problems for the entire euro region if rising financing costs make it difficult to service the country’s borrowing, Mundell said. Italy has about 1.8 trillion euros ($2.5 trillion) in debt, more than five times that of Greece and the equivalent of about a quarter of the euro zone’s debt.

If markets were to lose confidence in Italian public finances, then the European Central Bank would have its hands tied by the Maastricht Treaty, which says the central bank must orient monetary policy exclusively toward keeping inflation under 2 percent.

“The Treaty of Maastricht puts a straight jacket on the ECB,” Mundell said. “Monetary policy itself would have to bend a little if a country as big as Italy got into trouble.”

Italian Derivatives Draw Scrutiny

Inquiring minds note Italian derivatives draw scrutiny as Greece tensions heighten

With tensions heightening over Greece’s past use of currency swaps, attention turned Thursday to potential problems with local public finances in Italy stemming from the use of derivative contracts, currency strategists said.

Italy’s Audit Court late Wednesday warned that derivative contracts used by Italian municipalities could magnify debt and imbalances over time, potentially forcing authorities to “wring sacrifices from future generations for 20 or even 30 years,” Dow Jones Newswires reported.

Jane Foley, research director at, said fears that Italian municipalities may have significant derivatives exposure have dragged Italy’s government budget under the spotlight.

“While Italy appeared to be running a healthy primary surplus in the years ahead of EMU (economic and monetary union), its huge public debt points to years of poor fiscal management,” she said. “Whether or not its budget was enhanced by the use of derivative operations does need to be clarified.”

Mundell Wants Cap On Euro Gains

Rounding up out trio of Italy concerns about please consider Columbia’s Mundell Says EU Should Put Cap on Euro Gains: Video .

Nobel laureate Robert Mundell talks with Bloomberg’s Sara Eisen about the euro. Mundell, a Columbia University professor, said the European Union should cap gains of its currency so that it doesn’t exceed $1.40. Mundell also discusses Greece’s fiscal problems, the dollar and European monetary policy.

Click on previous link then click on the “Video” Tab to watch the Bloomberg interview.

Academic Wonderland

Mundell is yet another Nobel prize winning economist in academic wonderland. Japan has proven time and time again that currency wars never work.

Here is a brief summary of academic wonderland.

Krugman wants a weaker dollar, Mundell wants a weaker Euro, Japan wants a weaker Yen, and everyone wants a stronger Yuan except China.

It is impossible for everyone to get what they want: a weaker currency vs. everyone else hoping to stimulate exports.

Academia is never concerned with such details.

Mike “Mish” Shedlock
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