Italy's Sovereign Debt Crisis and the Euro Area: Diagnosis and Remedy

Abstract

Most of the European countries that are members of the euro area continue to face a crisis that is seriously undermining their economic and social development. The aim of this paper is to show that:(1) the sovereign debt crisis is essentially due to a monetary pathology related to the mechanism of inter-national payments;(2) the euro is not yet the single European currency it was intended to be;(3) euro-area countries could recover their monetary sovereignty and solve their sovereign debt crisis while going on using the euro as their international means of payment;(4) Italy can protect itself against the loss generated by the pathological increase in its sovereign debt and benefit from a yearly gain of several billion euros; (5) monetary unification requires a reform of the present system of payments, both among euro-area member countries and between them and the rest of the world.The analysis is macroeconomic, and rests on a thorough investigation of bank money, double-entry book-keeping, and the system of real-time gross settlements. The key message conveyed by the paper is that, even though the actual economic and financial crisis has its source in a pathology that has so far remained unnoticed and will eventually be eliminated only through a reform of the present (non)-system for international payments, any single country can implement a mechanism sheltering it from the consequences of this pathology.