Italy wonders if it is time to cut and run

Via Samizdata and the Adam Smith Institute Italy could destroy the Euro, just as it destroyed the ERM (much to Britians benefit as it turned out), and destroyed the nineteenth century equivalent of the Euro (which Britian declined to join).

While detailed consideration of these arguments is probably premature, the practical implication is clear: If the possibility of an Italian withdrawal were ever taken seriously by the markets, foreign holders of Italy’s € 1.5 trillion public debt would face enormous losses, big enough to endanger the solvency of many non-Italian banks. In other words, the Italian Government is now in a position to kill the euro and wreck the European banking system merely by threatening to withdraw.

The reason that it might is exactly the same as in the two times that it did destroy European monitary union, the policies are crippling the Italian economy. The EU will claim that the treaties are binding and there is no way out, but it is wrong. As a soveriegn country Italy has every right to create a new currency and rewrite all of its old debts in this new currency

Hal Scott, of Harvard Law School, and Charles Proctor, a solicitor at Nabarro Nathanson and author of a new chapter on withdrawal from the eurozone in the sixth edition of Mann on the Legal Aspect of Money, a book described by central bankers as “the Bible” of international monetary law. Unfortunately for the ECB, in its role as the guardian of the European banking system, both these authorities agree on two points: first, that despite the prohibitions in EU treaties, the Italian Government would have the legal ability to recreate its own currency, although withdrawal would, of course, entail big financial and economic risks; secondly, that the Government would be entitled to rewrite Italian financial contracts, including its own bond obligation, into new lire — and that investors who claimed to be defrauded by such a “redenomination” could not expect support from British or American courts.

This might turn many banks insolvent and send massive shockwaves through the Eurozone creating an enourmous financial crisis but Italy has every right to do this if it chooses. That is the point of it's being sovereign, it can start whatever action it wants even if it might not be able to survive the repercusions.