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Foreign Exchange for Expats in Italy

Submitted: April 2014

The official currency in Italy is the Euro (EUR). The European Central Bank (ECB) is responsible for monetary policy, and it is an autonomous institution.

The Euro-zone has never imposed exchange controls since the introduction of the Euro. There are no restrictions as to the holding of foreign currency in Italy, and Italian residents may hold non-Euro investments.

Exchange rate regime

The Euro follows a purely freely floating exchange rate regime. There is no official exchange rate target. The ECB may sometimes intervene in foreign exchange markets, but such interventions are very hard, if not impossible, to predict.

The Euro challenges the US dollar as a world currency. Many other currencies are pegged or somewhat connected to the Euro. These include notably Denmark, Morocco, most Eastern European countries, and most French-speaking Sub-Saharan countries.

Monetary policy

As per article 127(1) of the Treaty on the Functioning of the European Union (TFEU), the ECB’s primary mandate is to maintain price stability. Without prejudice to this objective, the ECB must also support the EU’s general economic policies.

Inflation-targeting lies at the heart of the ECB’s commitment to price stability. The ECB targets an inflation rate below but close to 2%, where the relevant inflation rate is the Euro-zone Harmonised Index of Consumer Prices (HICP).

On-going developments

Since the introduction of the Euro, the average inflation rate across the Euro-zone has broadly been in line with the 2% target. As of now, the Euro-zone is facing a serious deflation threat as the inflation rate has dipped as low as 0.5%. Interest rates are at record lows and current monetary policy is already loose.

Dovish monetary policy is in line with the current international trend. As a result, the Euro exchange rate is not necessarily affected, especially if you come from another country with a dovish monetary policy. You might wish to check how the ECB’s policy interacts with that of your home country, as well as how the markets price this.

If the ECB ever decides to tighten monetary policy (e.g. because of high inflation), interest rates would rise, liquidity would dry up, and securities prices should go down.

Euro-zone crisis and FX considerations for Italian residents

There is rampant concern about a possible breakup of the Euro-zone. In such a case, Italy would likely switch to a lower priced currency, which is bad for expats with accounts in Italy. That being said, market turmoil has dramatically eased over the past year in Italy. The Government’s 10-year borrowing costs have dropped to 3.1%, which is a sign that the markets have returned to a more stable environment.

A break-up of the Euro-zone should not happen over the short-term. Long-term concerns may still remain in light of Italy’s ultra-high debt levels (around 120% of GDP) and the growing euro-scepticism across the EU.

 

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