Italy can sink Europe?

But with the alarming situation created by the populist government in Italy, we can't be safer than the Eurozone and expect good days.

Italy was the first country I studied in 1982, so I have a special kindness. I worked for a very large American company at the time, and I still remember when I went to the frequent transatlantic conferences held to discuss Italy's huge debt.

The question that everyone raised was when bankruptcy would be declared. But it didn't. Italy continued to survive in trouble and has continued to do so. Now that the Italian government seems committed to opposing the EU, no one would be surprised if the bankruptcy concerns returned.

My 30-year experience shows that Italy's economic woes have started since before it took the Euro. There has always been low productivity, compared to European standards, which translated into low economic growth prior to the euro. At the same time, risings from time to time were only sowing seeds for other crises, constantly depreciating local currency, free.

Of course, there are people today who look forward to the time when the value of freedom could be lowered to restore economic growth. This is no longer possible, with the common currency. But what they forget about those who romantically see the pre-European era is that Eurozone membership has given Italy low inflation, which also reduces interest. In addition, there is reason to think that depreciation of freedom has done more harm than benefit. Although they improved their competitiveness slightly, depreciations required structural reforms that could increase productivity in the long term.

There are those who think the Eurozone's fiscal and monetary structure puts Italy into a poor GDP growth, with perhaps low inflation and high debt. But before Italy's new government came to power, Italy's fiscal deficit -- gradually regulated by cycles, unlike debt -- was often more limited than in other Eurozone countries than in the G7 countries. (Canada, France, Germany, Japan, United Kingdom, and the United States).

However, political parties that had governed Italy until this year had failed to achieve the nominal GDP growth, which the country needs. As a result, Italians chose an unusual coalition whose programme combines the policies of both sides, left and right populists. While Lega Nord promises to lower taxes, 5 stars seek to provide a fixed income base for people in need.

But what Italy needs is a broad programme of structural reforms to improve productivity. This is the only way to get higher and longer-term growth, looking at the country's demographics. Besides establishing policies that would increase women's participation in the job, Italy should offer even better opportunities for young people.

The EU must do more to help Italy take appropriate steps. The European Commission, the Central Bank of Europe and the German government have erred in demanding implementation of the EU Stability and Economic Growth Pact, and especially the 3% limit imposed on fiscal deficits.

Although some countries have been allowed to breach the deficit limit, this has never been allowed to Italy because of high debt. As experience with Belgium and Japan shows, high government debt can be reduced only through sustainable economic growth.

To complicate matters even more, some reforms that would improve long - term productivity can reduce growth in the short term. Any government that would implement such measures would have to have the possibility of cyclical stimulus.

Another problem is that with monetary policies. The European Central Bank should be more open-minded in terms of achieving inflation target of 2%. This goal, along with that of Germany, which is 2%, puts Italy in a low inflation situation even when it can benefit from monetary policy incentives.

Under these conditions, EU authorities do well not to strongly oppose the plans of the current government. If liberals worry about the implications that this democraticly elected populist government would create, then they should be even more concerned about what might happen next if economic circumstances get worse. At this stage, Italy needs strong economic growth in short and simple.

Some would say they were wrong when they admitted Italy to the Eurozone and that the common currency area should have been more discriminatory with membership. But business communities in France and Germany have insisted that the monetary union include some of Italy's most competitive companies. And when Italy had met the terms of accession, so would many other countries.

In the end, those who have the power to implement EU fiscal regulations know very well that the Eurozone would not survive if Italy undergoes a crisis similar to that of Greece. It is their responsibility to make sure in the coming months that things do not reach that point.

Jim O'Neill, former United Kingdom Treasury Minister

Project Syndicate