Though inflation rates in EMS countries have significantly converged over the past decade, exchange-rate adjusted price levels have sharply diverged and continue to do so, albeit at a decreasing rate. This violation of purchasing power parity (PPP) may be viewed as a stylised fact in international finance.The failure of PPP to hold continuously is well documented empirically. However, there is growing evidence that it does hold as a long run phenomenon. A broad body of evidence suggests that real exchange rate is not a random walk, and that shocks to real exchange rate damp out over time albeit very slowly.Consensus estimates and studies of purchasing power parity, surveyed in Froot and Rogoff (1995), put the half-life of deviations from PPP at about four years for exchange rates among major industrialised countries. Recent attempts to formulate and test the structural models of deviations from PPP, [Asea and Mendoza (1994), Marston (1987), De Gregorio, Giovannini and Wolf (1994)] stress the different behaviour across countries of the prices of manufactured goods relative to that of service. In fact, several recent studies [for example Engel (1996)] that employ unbundled data, have investigated the extent to which departures from PPP are caused mainly by the presence of non traded goods versus deviations from the law of one price in traded goods. In particular in the EMS area, a sizeable fraction of changes in Intra-European real exchange rates may have been driven by changes in domestic relative prices between traded and non traded goods, rather than by changes in the prices of tradable goods across countries. In fact a marked divergence in inflation rates between the tradables and non tradables sectors has been a feature of some EC economies, especially those of Italy, Spain and UK, since the early 1980s. Sectoral productivity differences, international competitive pressure and Government demand for non tradables are possible reasons.This paper investigates whether, the traded non traded model can be used to provide a measure of the deviation from equilibrium of the Italian Lira ECU real exchange rate.

Italy's adoption of the euro in 1999 was hailed as a major political achievement and an opportunity to secure macroeconomic stability and push through reforms which domestic institutional and political weaknesses would otherwise have made difficult. At the same time, it was clear that the single currency would bring significant challenges: exchange rate adjustments could no longer be used as a quick fix in the event of competitiveness losses and the fiscal authorities would have to respect the discipline imposed by the Stability and Growth Pact. A decade after the creation of the Economic and Monetary Union (EMU), Italy is still adjusting to the new policy environment created by the euro. This book assesses Italy's experience in EMU to date, identifies the main challenges ahead, outlines key policy issues that will continue to shape the economic debate, and highlights how Italy's experience offers lessons for other current and prospective euro area members. Bringing together contributions from policymakers, academics, international organisations and the market, this book is essential reading for all those interested in the economic challenges facing Italy and EMU more widely.

Sir Alan Walters ex-chief economic advisor to PM Margaret Thatcher Whether it succeeds or fails, Europe is everyone's concern. The idea of a united Europe has been entertained, even partially at least, achieved, inter alia, CharlemagI!e, Napoleon, Hitler, and in our da)' by Spaak, Monet and Chancellor Kohl: the first three by military conquest, the last three by "negotiation" and the creation of integrating institutional arrangements. The motives varied from the twisted paranoia of the Nazis to the idealism of SpaaklMonet/Kohl in avoiding conflicts and wars. Under the protection of NATO the European Coal and Steel Community soon was transformed into the EEC by the 1957 Treaty of Rome. The massive reduction of trade barriers, particularly between France and Germany, was rewarded by vigorous growth over the next 15 years. Even as late as 1972, when Britain acceeded to the Treaty of Rome, the EEC was thought to be lar~ely a customs union: in de Gaulle eyes the EEC was simply a collection of sovereISJ:l states who cooperated primarily on trade. Each state however enjoyed a veto; deCIsions had to be unanimous.

Few established European democracies have undergone as much change as Italy in recent years, and here is a book that explores precisely what has been achieved – from a public choice perspective. The book pays particular attention to, among others, the introduction of the EURO, the reform of voting from proportional to majoritarian rule, and the switch from a highly centralized government to a federal organization.

To make a first assessment after about a year's experience with economic and monetary union; 2. To examine the impact of EMU and the introduction of the Euro in various areas of economic policy, involving both government and the corporate sector including the banking industry; 3. To provide an insight into the challenges that the Euro offers for the coming years with respect both to macro-economic policy and the development of the financial markets and with respect to business management.

This book aims to answer a number of important questions. To what extent have European countries converged or diverged with EU-wide economic and social indicators over the past 20 years? What have been the drivers of convergence? Why do some countries lag behind, while others experience continuous upward convergence? Why are these trajectories not always linear? Particular attention is paid to the role of institutions, actors and industrial relations – focusing on the resources and strategies of governments, employers and trade unions – in nudging EU countries onto an upward convergence path.