News Analysis: Italian PM's vision of euro-dollar parity inching closer to reality after ECB's QE

Italian Prime Minister Matteo Renzi said this week that he "dreams" of parity between the euro and dollar currencies. Recent moves from the European Central Bank (ECB) may make it more likely he will realize his wish sooner rather than later.

Economists say a weak euro could be a major factor in helping Italy break free from the stubborn economic recession that has gripped the country since 2008. More than most other European states, the Italian economy is based on tourism and exports, which benefit from a weak currency, and less on domestic consumption and services.

A weak currency makes it cheaper for non-European tourists to travel to Italy, for example, and it makes the prices for Italian goods cheaper in other currencies. Additionally, a weak euro makes domestic prices for foreign goods higher, likely sparking higher consumption of Italian-made goods.

Italy is familiar with the benefits of a weakening currency: the country remained competitive during the 1980s and 1990s in part by formally acting to devalue the lira -- Italy's currency before the euro -- three times in the eight years before the lira was pegged to the euro. Bank of Italy policies at the time also resulted in a gradual erosion of the lira's value between devaluations.

"The introduction of the euro had positive and negative impacts for Italy," Javier Noriega, chief economist with investment bankers Hildebrandt and Ferrar, told Xinhua. "A strong currency made it easier for the government to borrow money, and for Italians to travel abroad. But it also made it impossible to conduct a devaluation, and as a result the economy suffered."

That is the reason why Renzi, speaking this week from the World Economic Forum in Davos, Switzerland, stated his taste for parity -- referring to more or less equal value -- for the euro and the dollar.

It has not reached that level yet, but momentum is pushing it closer each day. At the close of trading on Thursday, one dollar bought a little more than 89 euro cents. As recently as last May, a dollar bought just 71 euro cents. The euro has failed to gain value against the dollar now for eight of the last nine trading sessions.

The euro has seen its value decrease nearly as much against other leading currencies.

Thursday alone the euro lost 1.5 percent of its value, after the ECB announced plans to spend as much as 60 billion euros (68 billion U.S. dollars) per month on euro-zone government bonds. The plan, called "quantitative easing," aims at propping up indebted economies like Italy while adding to the money supply to stave off the threat of deflation, where demand is so low prices drop. But the announcement, weighing in at 20 percent more than the 50-billion-euro budget analysts speculated earlier in the week, took its toll on the euro's value.

Analysts said the euro is likely to drop further before it finds support levels.

"The situation is complicated by the fact that the U.S. economy is recovering while Europe remains weak," Fabrizio Piazza, an economic risk analyst with ABS Securities, said in an interview. "Investors are selling their euros to buy dollars. At some point, that will level off because the dollar will become too expensive and the euro will look cheap. But we don't seem to be approaching that point yet." Endit