Italy's love affair with the euro is due to cool

The execrable Giscard d’Estaing is at it again, this time to offer a new definition of democracy. France, he argues, has not rejected his proposed European constitution – because 45% of the people voted for it, and only 55% said “no”. This effort to revive the constitution – or constitutional treaty as it was finally dubbed – should not go unnoticed. It comes at a time when the European project’s totemic creation, the euro, is under threat.

Italy has a problem. Two problems, actually.

The first is that its economy is moribund. Short of solving the structural problems that are hindering economic growth, or in combination with such reforms, an independent Italy would lower interest rates. But it gave up control over monetary policy when it joined euroland. Worse still, the European Central Bank seems intent on raising interest rate, which may be necessary to stem inflation in other countries, but can only throw Italy into a deeper recession.

The second problem is that the tradable goods for which Italy is famous – shoes, apparel – are precisely the goods that can be produced more cheaply in the workshops of Asia. Under ordinary circumstances, if such circumstances ever existed in Italy, the government would devalue the lire – you remember the lire – to lower the cost of Italian products in overseas markets. But the lire is then, and the euro is now.

So devaluation is not an available solution to Italy’s noncompetitiveness. That leaves it with a few choices. It can simply allow some of its industries to die, unemployment to rise, and hope that in the long run new industries will emerge to restore some semblance of full employment to Italy. Alternatively, the nation’s firms can lower wages and other components of labour costs – no easy thing in Italy.

Or Italy can say goodbye to the euro, reintroduce the lire, and regain control over its economic fate. Of course, it hasn’t done too well in the past when a succession of weak government proved incapable of instituting the reforms necessary to transfer the Italian economy from weakling to powerhouse. And there is no reason to believe that its new government, led by dedicated Europhile Romano Prodi, can either do any better, or is willing to abandon the euro. In short, the outlook would be bleak – were it not for Italians’ proven ability to develop ways around governmental ineptitude and wrong-headedness.

Comments

[Frank Schnittger]

As Ronald Reagon once said "there you go again!" Any excuse to have a go at "old Europe" or anyone who doesn't follow the Neo-conservative line has to be utilised with barely disguised glee. Never mind the facts - one of which happens to be that Italy has been ruled for the past 4 years by one Silvio Berlisconi - Billionaire, Iraq war monger, and friend of the Neo cons! Poor old Prodi is barely in office for a month and all of Italy's problems are said to be the fault of this "dedicated Europhile".

Well not all - the other culprit is the Euro - which is blamed for causing interest rates that are too high for Italy. At a simplistic level this argument may have some truth. It is only obvious that Euroland interest rates will - at any one time - be too high for some states and too low for others. That is a bit like saying that inflation is above the EU average in some states, and below in others. Averages are a bit like that - they are higher than low values and lower than the highest values! What you ignore, of course, is that Euro interest rates are a lot lower than those in the US or the UK - and probably a lot lower than they would be in an independent Liraland because of the risk premium such a country and currency would attract.

The neo cons seem to be obsessed with trying to keep Europe weak and divided, so that it can never pose a threat to US hegemony - hence their love affair with their toady Tony Blair. But Europe isn't buying it, and judging by the lack of responses to your blog - neither are Timesonline readers.

[Peter Bray]

Does Irwin Stelzer think either:-
a. Italy should leave the euro.
b. Italy should never have joined the euro
c. The euro should never have been created
Personally I think a single currency is unlikely to work well unless you have a single government in charge of economic affairs. However, I am reminded of the gold standard, which did work reasonably well for quite a long time without a single government. It did not withstand the shock of the first world war, but it is doubtful whether any system would have done so.

[Claudio Frasca-Polara]

Unforgivable, Mr.Stelzer. How could you possibly overlook the fact that the Euro has been - and still is - the most reliable sentinel against Italy's greatest enemy (after Berlusconi, of course), i.e., the cost of its enormous debt?

Should Italy switch back to the Lira - as the aforesaid confounded demagogue suggested - we would no doubt go back to an unbearable two-figure cost of financing the debt.

There's no getting away from it: the way out is to invest in R&D, in schools, colleges and universities because only a renewed culture can drives us out of this vicious circle.

The point, rather, is weather Professor Prodi's government has the strength to withstand the political costs that are the inevitable tolls to this new renaissance.

[Johannes Walter]

I agree with Frank Schnittger's points. Irwin is well known for peddling a line rather than disecting an issue. For someone who runs a respected institute to confuse monetary policy with economic policy is beyound belief. Let's repeat for the sake of Irwin and others: the European Central Bank is responsible for maintaining the value of money in Euroland. It therefore uses interest rates to combat inflationary pressures. The Bundesbank acted in this way, and no one ever suggested that the Federal government had therefore no control over economic policy! Yes, economic policy is and remains the prerogative of each and every EU government. Not that Irwin will tell you this anymore than this newspaper and any other anti EU newspaper will. Italy, France and Germany are in trouble because their political leaders haven't the guts to admit they can't go on with the kind of expensive social system they have. Germany has begun a trend of simply solving the problem by raising taxes and if other EU finance ministers see this as as passing without a whimper from voters, they will do the same. The European Central Bank is well aware of this trend and very alarmed by it. It is exactly the opposite of what is needed and what the bank has called for since its inception - major and profound structural reforms. Governments of all EU countries now eat up monstorous amounts of national incomes - Britain included. If this trend continues we shall reach a stage where states might not, to adapt Marx, own the means of production, but certainly own the fruits of its labour. In other words a brand of Communism by another name - Democratic autocracy.