The most likely scenario is that EMU (Economic and Monetary Union of the European Union) will occur but will neither end Europe’s currency troubles n… - Rudi Dornbusch

Italians dream that the ECB (European Central Bank) will make their life easier than the Bundesbank does now... The new central bank is certain to establish itself at the outset as a direct continuation of the German central bank.

In figure 3 we show the money and domestic asset market equilibrium schedules for given stocks of each of the assets. Along MM the domestic money market is in equilibrium. Higher interest rates reduce money demand so that equilibrium requires a depreciation and thus a rise in the domestic currency value of foreign assets and - hence wealth. The exchange rate thus plays a balancing role by affecting the valuation of assets.

The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.