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 es… - Rudi Dornbusch

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 nor solve its prosperity problems.

Once Italy is in, with an appreciated currency, the country will soon be back on the ropes, just as in 1992, when the currency came under attack.

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.