The Italian government is defying the European Commission’s request that it revise its draft budget for 2019 to reduce the deficit. Bond yield spreads are widening and Italian banks are under pressure. Should a bank run ensue, could the euro fall apart? After German reunification, interest rates rose to over 9 per cent in the early 1990s. Other countries that pegged their interest rates to the Deutsche mark through the exchange rate mechanism of the European Monetary System (EMS) could not keep pace. Currency speculators forced devaluations and, finally, a far-reaching decoupling of the currencies participating in the system. This experience motivated many European politicians to press for the rapid introduction of a single European currency. No country should be forced to crash out of a monetary union by sheer market forces. But is the euro today really safe from such destructive market forces? In a recent analysis, Stefan Homburg of the University of Hannover answers this question in the negative. He concludes that a euro area country could be broken out of the monetary union by a “run” on the bank deposits there. How would that be possible? Let’s look at the situation in Italy, where banks have begun… Read full this story
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