Market attention has changed from Greece to Italy. As in Greece the centre of attention is the dual concerns of public finance trouble and political uncertainty.

A look at Italian economic and monetary history, however, reveals some interesting facts. While Greece is a serial defaulter Italy has in fact only defaulted on it’s public debt one time since Italy become an independent and unified nation in 1861. Contrary to this Greece has been in default in more than 50% of the time since it became an independent nation in 1822 (1830).

Minimal knowledge of Italian history will teach you that the country is notorious unstable politically and that public finance trouble historically as been as much a norm as in Greece so how come that the Italian government has not defaulted more than once?

Some Unpleasant Monetarist Arithmetic will help us explain that. Sargent and Wallace teach us that public deficits can be financed by either issuing public debt or by printing money. Historically Italian governments have had a clear affinity for printing money.

Rogoff’s and Reinhardt’s “This Time is Different” provides us with the statistics on this. Hence, among the present euro countries Italy has been the third most inflation-prone country historically – after Austria and Greece. Hence, since 1800 Italy has had inflation above 20% in more than 11% of the time. The similar numbers for Austria and Greece are 20% and 13% respectively.

Michele Fratianni, Franco Spinelli and Anna J. Schwartz have written the “Monetary History of Italy” and the authors reach the same conclusion – that the core of Italy’s inflationary problems is the Italian government’s lack of ability to balance the budget.

This time around the money printing option is not easily available – at least not if the Italian government wants to keep Italy in the euro zone. Sargent and Wallace would tell us to watch inflation expectations to see whether the Italian government is credible or not when it says it will not leave the euro.