So then, who was to blame? According to the Paris-based International Herald Tribune, the answer was Italy. A front page story in the newspaper last week spelt it out loud and clear: "Euro hits Low on Italy Deficit Deal".
The Financial Times had come to much the same conclusion a day earlier, declaring: "First Cracks Show in Euro Pact After Italian Deal".
Curiously, however, the authoritative Milan daily, Corriere Della Sera carried a headline which read, "The Falling Euro Worries Europe", accompanied by a statement from Treasury Minister Giuliano Amato claiming that Italy was not to blame for the euro's market reversals. So then, who do you believe?
What is certain is that last week's decision by the European Union's finance ministers to allow Italy a higher public deficit than originally planned (up from 2.0 per cent to 2.4 per cent of GDP) has rekindled a debate that dominated much of the three years leading up to Italy's inclusion last May in the start-up of the euro.
On the one hand, there are those European central bankers such as Mr Edgar Meister and Mr Klaus-Dieter Kuehbacher of the Bundesbank who this week argued that monetary policymakers have been "stabbed in the back" by the politicians' decision re Italy. For most of the last three years, Bundesbank and other officials have been more worried about Italy's long-term ability to maintain the fiscal rigidity imposed by euro-zone public finances than by its short-term capacity to meet the convergency criteria.
Put simply, they argued that Italy would work miracles to get its house in order to make the start-up of the euro, but would then promptly abandon its new-found fiscal rectitude just as soon as it was in. Such an analysis suggests that the euro's market plunge, dropping to an all-time low against the dollar, was sparked by the sensation that the deficit concession to Italy was but the thin end of the wedge - the first fatal crack in the rigid management of euro-zone public finances.
Inevitably, the Italian view is in sharp contrast. Minister Amato has spent much of the last week repeating his view that the euro's problems have less to do with Italy's deficit deal than with the fact that while the US economy continues to grow briskly, those of the bigger EU countries such as Italy and Germany remain sluggish. In an interview last weekend with Corriere Della Sera, he expanded on his theme: "I can understand that people watch us very carefully given that Italy has the highest public debt in Europe, today at 118 per cent of GDP. . . But the mistake that people make, or want to make, when they blame Italy for the euro's weakness re the dollar is that they are mistaking a simple economic forecast for a weakening of financial rigour."
That "simple economic forecast" suggests that the Italian economy's growth rate for 1999 will not exceed 1.5 per cent, well short of the government's original target of 2.0 per cent. In such a context, argues Mr Amato, he had little option but to present a realistic forecast, warning his EU partners of Italy's inability to stay within the targeted 2.0 per cent Deficit/GDP ratio.
Prime Minister Massimo D'Alema got in on the act, too, standing by his Treasury Minister in parliament this week and pointing out that May 1999 figures showed Italy's budget deficit for the first five months to be $6.1 billion (€5.8 billion) lower than 1998, adding: "[These figures], based on facts and not intentions, are the just reply to the defamatory campaign mounted against our country and against Italy's reliability. . . The government is continuing a policy of maximum rigour, in line with its commitments."
The tone is convincing but can and will Italy honour its commitments? To keep his partners happy, Mr Amato last week in Brussels promised to reduce Italy's deficit to 1.0 per cent of GDP by 2001. That promise, however, may prove difficult to maintain given the Italian economy's current sluggish condition.
The tough fiscal squeeze implemented over the last three years to get Italy into the euro in the first place plus export losses in Asian and Russian markets have not helped. Many analysts argue, however, that Italy's biggest problems concern structural difficulties in the economy: the inflexibility of the labour market, the inefficiency of public administration and, above all, its costly pensions systems. (Italy spends 15.7 per cent of GDP on pensions as compared to an EU average of 12.1 per cent, while demographic considerations suggest that by 2003 or 2004 pension spending will be unsustainable.)
Further pensions reforms, in the wake of limited ones already enacted in the 1990s, look like a tall order. Firstly, they would inevitably prove viciously unpopular, prompting head-on confrontations with the trade unions and others. Secondly, Mr D'Alema's centre-left coalition is currently divided on issues as varied as Italy's involvement in NATO's military campaign in Yugoslavia, invitro fertilisation and state subsidies for private schools. There is little reasonable hope that such a coalition could ever agree on structural reforms of the pensions system.
Mr Amato, who inherited the Treasury hot seat just last month following his predecessor, Carlo Azeglio Ciampi's election as state president, is sure to find the seat even hotter in the months to come as he comes under ever closer scrutiny from his EU partners.
