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.

Keywords: Money, Euro system, sovereign debt, interests on foreign debt, monetary sovereignty, monetary unification, system of international payments

JEL Classification: F02, F34, E02, E5, G15