How Italy’s situation is affecting the euro zone

The deterioration in Italy’s economic and financial situation is affecting the euro zone via several channels: The persistent risk of a public debt crisis in Italy is leading the ECB to maintain a very expansionary monetary policy; The bad situation of banks and the decline in credit in Italy are also leading the ECB to keep interest rates very low, which is a source of conflict with the countries where credit is increasing rapidly (France, Germany); Italy’s bad situation has led to a negative perception of the euro zone among investors, leading to capital outflows, a weak equity market and a depreciation of the euro; Of course, Italy's zero potential growth is reducing the euro zone's overall potential growth and also driving down interest rates. Italy’s situation accentuates the euro zone’s heterogeneity, which makes monetary policy choices more difficult .