Does the future of the Euro really depend on the Italians?

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Does the future of the Euro really depend on the Italians?

03 Febbraio 2014

“The real measure of your wealth is  how much you’d be worth if you lost all your money”(Author Unknown)

Italy’s economy is slowly getting back on track. Or at least, this is what the organization representing Italian manufacturing and services companies declares. According to the latest Confindustria estimate, in fact, Italy industrial production is up 1.2% with respect to last year’s performance. 

And this is particularly important nowadays, since European Central Bank policymaker JoergAsmussen recently declared that the future of European economic and financial stability depends, among other factors, also on the state of the Italian economy.

“Italy is too big to be rescued from the outside,” said Asmussen at the Bocconi University in Milan, “it has to make the turnaround on its own… its fate will critically determine the fate of the euro area… in this sense, the future of the euro area will not be decided in Paris or Berlin, or in Frankfurt or Brussels. It will be decided in Rome.”

However, some argue that the problem with European financial stability is hardly just an Italian problem, let alone a Roman one. Perhaps it has more to do with the general failure of the Euro and with European integration policies as well as with the faith that Europeans themselves have in their own currency and institutions.

But, actually, do Europeans have any faith left in their institutions? According to the a recent survey conducted by the Eurobarometer, public confidence in the EU institutions has never been so low, especially in Germany, Italy and Spain.

François Heisbourg, Chairman of the International Institute for Strategic Studies, recently published a book entitled “La Fin du RêveEuropéen” (The End of the European Dream). The book explains the Euro in terms of an economic catastrophe.

Meanwhile, the British press is also concerned with the slow growth-rate of business in the Eurozone, according to the the BBC, in fact: “there has been speculation that the ECB might offer another round of cheap, long-term loans to banks to keep the cost of credit down.”

And The Telegraph recently quoted Silvio Berlusconi’s call for a showdown with Germany over fiscal policy.  The press is debating about both the stability and the effective feasibility of the Eurozone also in France, especially in the light of latest financial/political developments.

Certainly the problem with European financial stability is also Italian: the political and economic situation in Italy is far from being perfect, and Italians have never been able to get rid of rampant nepotism and anti-meritocratic tendencies. And while relations between Rome and Bruxelles seem to be lost in translation, according to another recentpoll, almost 48% of Italians are now in favor of abandoning the Euro and going back to the Lira.

And that might very well sound right down blasphemous to the ears of European bureaucrats that sits in Bruxelles. Especially given the state of Italian economy. Despite Confindustria’s optimism, the Italian Institute for Statistic (ISTAT) says Italy’s Gdp during the second semester of 2013 was still lagging at 2,1%.

ISTAT’s data also show that the pace of industrial production in Italy is sluggish. The economic situation in Spain is far from being ideal, too. recently published an article that deals with advantages and disadvantages of the recent revaluation of the Euro in comparison to the Dollar. This could, according to ABC, reduce global appeal for European goods — “Podríaser un frenoparalasexportaciones.”

In the meantime, Germans seem to be justly concerned with their internal problems and the Deutsche Bank’s financial situation; and yet, they are still carefully monitoring Italian economic news. Die Zeit, for example, recently speculated about the “Italienische Depression” and went so far as arguing that “Italienist das größteRisiko in der Euro-Krise.” (Italy is the biggest risk in Euro’s crisis).

The fate of the European economy is not only at the center of attention in Europe, but also elsewhere. For instance, China’s foreign minister Wang Yi paid a visit to France, back in November 2013. Was that pure coincidence? Perhaps, but even if his diplomatic visit was mainly aimed “at strengthening relations between Beijiing and Paris”, one can bet Mr. Wang Yi didn’t discuss only diplomacy with the French.

But if it’s true that the future of the Euro depends on the state of Italian economy, like Asmussen said, how about the fact that Italians might actually want to go back to the Lira? Well, the italiani might have a point, but even if they do, the problem, unfortunately, seems to be far more complicated than that.

When confronted with the uneasy question of whether or not national States that embarked in the EU integration process a while ago can exit the Eurozone, European politicians usually answer that this possibility is “not in the Treaty”. It actually means that Europe can no longer exist if anything like that happens. During the last fifty years, European national States have willingly relinquished their sovereignty to European institutions.

Judging by the polls, however, it seems like European people didn’t do the same or, at least, that they were not fully aware of what they were doing. So, this is also an issue of political representation after all. But the fact remains that European law overrides national law and goods are produced according to strict European directives on the Old Continent and by all of the twenty-seven member States.

Plus, capitals and people can move freely inside the European internal market. The last bits of national sovereignty that the various European States had always been reluctant to give up during the integration process had to do  – not surprisingly– with monetary policy and defense.

The Brits, in particular, have always been adamant on monetary policy. Back in 2000, when Britain’s Prime Minister Tony Blair gave a speech about the single European currency, he quoted Gordon Brown – the then Chancellor of the Exchequer – and famously stated that the British Government was in favor of Britain “joining a successful single currency”.

Notice the word “successful”: British people have always been pessimistic about the Euro. In fact it was an English journalist who invented the expression “euro-skeptic”. But Italians, on the contrary, seemed to be excited about the Euro. Tommaso Padoa-Schioppa was certainly amongst the Euro-enthusiasts, for example. If it’s true that for his famous book “The Euro and its Central Bank”, he had envisioned another title instead: “E Pluribus Unum”. But the publisher did not agree: that sounded way too American.

A very interesting case of Freudian slip, indeed. But it goes to show how a certain will existed, on the part of European economists, to shape Europe’s future on the well-known and very much appreciated American model: different States united under a single flag, a single currency and a common cultural and religious heritage in the frame of a federalist institutional infrastructure. However, in the same book, Padoa-Schioppa also wrote that:

“Like Adenauer, De Gasperi, and Schuman in the 1950s, Kohl, Mitterrand, Andreotti, and Gonzalez in the 1980s knew little about the economic and technical arguments for or against monetary union.”(Tommaso Padoa-Schioppa, The Euro and its Central Bank, MIT, 2004. P. 29)

It’s another interesting point. Maybe, after all, the creation of the Euro was a political move, not an economic one? Perhaps, but now, ironically, the international status of the Euro might depend on another political decision: “how far would the European economic integration go?”, would have been a reasonable question to ask a European economist, up until two years ago. But the same question sounds now out utterly démodé. Another, more realistic one, could be: will European economic integration finally come to an end?

Sounds like a rather pessimistic question. But actually, according to economist Charles Wyplosz (an expert on European monetary integration), the European politicians that envisioned the advent of a single European currency also had a “hidden agenda”. (Charles Wyplosz, An International Role for the Euro? Pag. 76, in Jean Dermine and Pierre Hillion, European Capital Market With a Single Currency, Oxford University Press, 2002)

Their hidden agenda went far beyond the creation of the Euro. The Europeans wanted the Euro to achieve an international status to the detriment of the Dollar. It was the French economist Valery Giscard d’Estaing, in fact, who spoke about the “exorbitant privilege” of the American money and the necessity to “overcome” that obstacle.

The advantages that a single country can derive from managing a global currency like the Dollar are, in fact, innumerable. And we can tell this by looking at the “informal dollarization” through which America earns billions of dollars every year thanks to the simple circulation of its currency around the globe. Moreover, a key currency is also a symbol of supremacy and power.

The issuer of internationally powerful money can in fact exert its influence over the other actors in the global arena. A perfect example of “soft power” at work – to quote Joseph Nye – could be the Suez Canal crisis in 1956. In that occasion, the Americans (under Eisenhower) successfully pressured the British government of Anthony Eden to give up the fight in the Middle East.

They used convincing arguments: they threatened to sell all their Sterling holdings. This would have triggered a devaluation of the Pound which, in turn, could have ruined once and for all the already shaky grounds of Britain’s economy, at that time.

More in general, there has never been an influential and powerful empire in history that has not exerted its influence and power also through its currency, among other means. Money is one of the way through which human beings (i.e. empires, States, and dictatorships) express their identities and values. It is indeed, via an identification process (a gram of gold equals a certain value agreed upon by the entire society) that we can spend our money safely. And it is no coincidence that the use of money decreased during the Middle Ages, following the dissolution of the Roman Empire.

So, political stability is vital for the development of strong currencies. If they wish to go back the Lira, Italians must therefore figure out a way to achieve political stability in a relatively short amount of time. And if they want achieve any sort of economic relevance as an independent country, they must also figure out ways to convince other national States that their currency is reliable and can be used for various kind of transactions. Can they do this? It’s hard to tell. In the meantime, however, it seems likely that the FabbricaItalianaAutomobili Torino (FIAT), will become British and move its headquarters to Holland.

This should be seen as a wake-up-call for the Italians; they should be aware of the fact that the game of international trade has got much tougher in recent years. And that if they do go back to the Lira, they will find themselves in full-blown competition with tougher and bigger players.

Menzie Chinn and Jeffrey Frankel – of the universities of Wisconsin and Harvard – used an interesting example to introduce the subject of economic competition: during the early nineties the foreign exchange value of the Dollar went down and, at the same time, the German Mark and the Japanese Yen gained ground. The international community, therefore, started to question the US Dollar’s standing as the key global currency. Although, as Chinn and Frankel explain, “the observers had confused a fall in the foreign exchange value of the Dollar (1985-95) with a fall in its international role”.

So, the international community – at that time – was misled. But this goes to show that any fluctuation, even a short one, could provoke uncertainties about the value of a currency.

Speaking about faith, another critical factor to take into account when evaluating the international status of a currency is the trust that people have in that currency. And right now Italians do not seem to be putting to much trust on the Euro, exactly as other Europeans. But confidence that the value of the money will not fluctuate much in the future is a conditio sine qua non for the success of any global currency. Another crucial factor, however, does not depend on the money itself: this is what economists around the world call network externalities. How many people use the currency outside its own area and how they use it.

“There is a strong inertial bias in favor of using whatever currency has been the international currency in the past”, according to Chinn and Frankel. Nonetheless, other economists such as Padoa-Schioppa used to be far more positive about the future of the Euro. And some others even believed that the Euro could have easily surpassed the Dollar as the primary international currency, given time.

However, Professor Benjamin Cohen – a well-known expert on the field of international political economy at the University Of Santa Barbara, California – is of another advice. According to Cohen, there couldn’t have been a better opportunity for the Euro to finally catch-up with the Dollar than the recent financial crisis. Nevertheless, the surpass did not happen and the Dollar is still the most important currency in the world.

Professor Cohen also seems to be convinced that the rather positive exchange-rate performance of the Euro has tricked many economists into believe that the “impossible surpass” was indeed possible. In fact, the price of one Euro was just 0.83 Dollars in 2002, but it almost doubled six years later.

A very positive trend for the Euro, indeed. But Professor Cohen argues that “exchange rates are at best an imperfect indicator of a currency’s global standing” and that, in order to really understand where the money is going, one should look more closely at its use, rather than its value.

When speaking about the international role of the Euro one can easily mistake its regionalization – we can define in this way the process through which our currency replaced the old European single currencies – with its internationalization. And one can say more or less the same with regards to the Italian Lira".

"Internationalization occurs when a certain coinage is being used outside its own turf, between two actors of which none is the issuer of the money. In other words: one could talk about the internationalization of the Euro if Argentinian and Brazilian banks were buying reserves in Euros, or if traders in Shanghai and Honk Hong were making business in Euros with their counterparts in Russia. Or even if arm dealers in Congo were buying Euros instead of Dollars. All this isn’t happening tough, and that is why nowadays we say that Euro is “dominating in its backyard". And if that’s true for the Euro, what could possibly be the international role of a new Lira?

“The Euro has successfully attained a rank second only to the greenback – but it remains, and is likely to remain, a quite distant second”, at least according to Cohen. This doesn’t sound good for the Lira’s aficionados. But some say that, given a national currency and national bank, Italy could devaluate and bet on exports, even though that would cause Oil, electricity and Gas prices – among prices of other imported goods – to raise, too.

Nevertheless, being the issuer of a global currency is incredibly convenient: thanks to the phenomenon of “seigniorage”, for instance, America is earning an interest for each Dollar bill in circulation. Alan Blinder and Jeffrey Frankel have estimated that the U.S., in recent times, has been earning approximately 16 to 22 billion dollars a year from informal dollarization. Right now, the Euro is the second most strongest currency in the world: it isn’t ideal, but at least it’s something.

Strenuous advocates of the Lira will tell you that there are other advantages that the issuer of a global currency can exploit. One has to do with political flexibility: a government that print its own money – which circulate globally – has more freedom of choice when it comes to macroeconomic policies. For example, right now, the American government is much more independent than the Italian one, since it does not have to worry about external deficits as much as Italy does: it can finance part of the debts with its own currency. So, Americans are exploiting all these range of advantages that derive from issuing a currency which is really global.

This is the reason why, to challenge the Dollar’s standing in the global economy would be tantamount to challenge America’s stand in the global political arena.

But one thing is for sure: EU’s political structure is ambiguous and its economic system is hampered by a “strong anti-growth bias” in the provisions for fiscal and monetary policy: and that has to do with the infamous Stability and Growth Pact.

“Effectively, the Euro is a currency without a country, the product of an international treaty rather than the expression of one sovereign power”, wrote Cohen.

Even in this case, they keyword is stability. The European Central Bank is not the Federal Reserve, it was provided with poor instruments of intervention when it comes to financial stability, and it is mainly concerned with inflation, given its German bias.

According to the International Monetary Fund, the main problem with the European system of governance before the financial crisis was “the tension between the impulse toward integration… and the preferences for a centralized approach”. (International Monetary Fund, Concluding Statement of the IMF Mission on Euro-Area Policies, Washington, DC, May 30 2007)

But that was almost seven years ago. Now the problem seem to be about tensions between the impulse toward disintegration and the preferences for decentralized approach.

For any European member State, exiting the Eurozone means getting rid of all these structural and political problems. But maybe, in this case, the remedy could be worse than the disease.

Despite all these well-known issues, some argue that Italians should still go back to the Lira. This, they say, will result in a plethora of other advantages, apart from more political flexibility. But don’t forget that in times of political stability it could be easy to sell demagogical arguments. Italian politicians are well known for their lack of moral clarity. Knowing that the argument of the Lira has a strong appeal among youngsters, they can easily exploit it.

The iconoclastic 5SM movement’s recent political success is no coincidence. And its guru, a former left leaning comedian, is already trying to convince young Italians that they should quickly abandon the Euro and go back to the Lira.

To get an idea of how scandalously moron BeppeGrillo’s economic program is, just take a look at it. Fortunately, regardless of Grillo’s qualunquismo (whateverism), resuscitating the beloved Lira is easier said than done. Italy, in fact, would have to invest a lot of money to simply go back to its old national currency.

As Professor Cohen puts it: “For any country, there are both advantages and disadvantages in joining a monetary union; but the weight to be attached to those advantages and disadvantages may be different for different countries or may differ for any given country from one time to another. For Italy at the moment, the disadvantages of the euro are growing because of Italy’s persistent loss of competitiveness relative to Germany and some of the other northern EU countries, a loss that under the terms of a monetary union cannot be corrected by an exchange-rate devaluation or independent monetary policy.  So, in that sense, Italy would be better off today outside the euro zone rather than in it.  But the problem is that Italy IS in the euro zone, and the cost of leaving would be undoubtedly high.  So the question is: would the cost be higher or lower than any possible gain from going back to the lira? The answer is not clear.”

But let’s put Italy’s huge foreign debt aside for a moment and assume that the Italians will exit the Eurozone and revert to the Lira; will they then be capable of adapting their legal/judiciary/political system in a short time and prevent a colossal financial crisis? Remember: you need political stability in order to be able to do that.

In my humble opinion, it all goes back to a fundamental issue of political governance: ultimately, regardless of studies and data, the economic destiny of one nation in nowadays global economy, rests on the well-known saying: “the real measure of your wealth is  how much you’d be worth if you lost all your money”. It means that, if the future of the Euro depends on Italy’s economic performance, then it ultimately depends on Italy’s average educational level, research expenditure, the quality of the infrastructures, political stability and also financial stability.

Perhaps, with his Bocconi’s lecture, EU policymaker JoergAsmussen was just trying send a message to the Italians, so they could read between the lines? It could be. In fact, this does not seem to be the right moment for exiting the Eurozone. And in this respect Asmussen is right: because there can be no reverting to the Lira without causing another financial catastrophe.

What will happen to financial markets, the moment the Italian government announces its intention to go back to the Lira? It’s hard to say, but my spider-senses are telling me that such an announcement could be potentially lethal to European economy as a whole. Not to mention regional stability.
But the point is: even if the Euro will once again survive despite all odds, like it did in the past, there is no guarantee whatsoever that European policymakers will quickly resolve the aforementioned structural disadvantages, unless they start threating common financial and economic problems as “European problems”, not just “Italian problems”.

And in this respect, Asmussen’s argument sounds too much Bruxelles-centered. And I believe that this is a good example of distance between EU institutions and Europeans. The same sort of distance that doesn’t justify, but at least explains, the popularity of anti-European attitudes.