Introduction

Since the German reunification shock in 1990 Italy has been more concerned about changes in its political system than in maintaining its leading role in the development of the European Union. As a consequence, when the lira was attacked by foreign exchange speculation in September 1992 Italy withdrew from the European Monetary System and allowed the lira to float. The substantial devaluation that resulted helped renew Italy's exports, especially to its trading partners in the EU, producing a much more satisfactory economic performance, especially in the industrial north, than in Germany and France – until Italy rejoined the EMS at the end of 1996. Since then, however, Italy has been plagued by sluggish growth and continued high rates of unemployment, which have made political reforms more difficult. Coalitions led either by Romano Prodi, Prime Minister when Italy returned to the EMS in 1996, or by Silvio Berlusconi, Prime Minister briefly in 1994 and then again from 2001 to 2006, have differed in their approaches to both political and economic reforms.

The main economic problem facing Italy is the cost of servicing its huge public debt, which reached the equivalent of 122.7% of its gross domestic product by the end of 1994 and was estimated at around 120% in 2005. While the Italian government has run substantial surpluses in its primary government budget since 1992, the high interest charges on the existing stock of debt means that the overall budget continues to run in substantial deficit, well over the 3% guideline set by the Maastricht Treaty and the limit set by the Stability and Growth Pact.