Italy and the Euro

 

June 17, 2018

The change of government in Italy calls into question the German leadership of the European Union, which was myopic at best.
Italy has never benefited from the introduction of the euro. Its GDP per capita after the introduction of the common currency has stagnated. German-imposed austerity measures and the lack of solidarity among member countries in the euro club have contributed to transforming a once-promising monetary initiative into a fiasco. The common currency was supposed to bring prosperity and unity among its members. Instead, it brought misery in the South and pitched countries against one another (Joseph Stiglitz).
Sadly, nobody within the EU expects Germany to live up to the fact that it should have done much more to avert the euro crisis or to help countries in deep financial trouble. President Macron’s valiant efforts at reforming the Union and its common currency are likewise being torpedoed systematically by the German chancellor, who had lost touch with reality a long time ago and looks set to become the Union’s gravedigger.
In the current political climate, nationalists are gaining power in one member-state after another and xenophobia is on the rise. Such developments can only spell doom for the embattled Union, already weakened by Brexit and the debt crisis. Unfortunately, many economists or political analysts are not optimistic when it comes to the EU’s chances of overcoming its current woes. One can only hope that they are wrong and that the worst – i.e. the implosion of the Union – could still be avoided.

Will the EU Outlast the Euro Crisis ?

 October 13, 2011

According to the laws of aerodynamics, the honey bee is too heavy and its wing shape cannot support it in the air. This, nevertheless, does not prevent it from flying and tirelessly collecting pollen every day, which is the essential raw ingredient in the production of honey.

The sovereign debt crisis has provided fodder to critics of the EU’s institutional arrangements, at home or abroad. According to them, the European project is about to implode. Why, George Soros even compared the situation to that of the defunct Soviet Union ! The euro is described as “the most dangerous currency in the world”(Der Spiegel), the lack of a central government in Brussels is given as a liability, the EU’s soft power approach to foreign policy is being dismissed as less than impressive. From Joschka Fischer to the parties of the Left, many believe that the moment has come to rebuild the Union into a federal superstate, with a central government, a treasury and uniform taxation laws. This overhaul from the ground up of the EU is supposed to solve, almost overnight, all the problems confronting member countries, regardless of gaps between their different levels of economic performance, productivity, labour laws or even attachment to common European values.

I have no way of knowing how many of my fellow commentators have paid 1,700 pounds sterling from their own pocket – as I have in 1997 – to attend international conferences on the monetary union, back when the euro was still a project. As the owner of a small FMCG import business based in Romania, I had considered it my duty to be among the first to learn what the project entailed. Naturally, I would have been happy to be able to use a single currency in order to reduce my transaction fees on every load of goods imported from the UK, and wrote so in a position paper I spread in London among the participants at the conference. During lunch, I was seated at the same table with Russian bankers and an Italian central banker. At the time, I routinely assumed that the Italians, like myself, were interested in learning more about the common currency project as observers, without however hoping to join it as members…

In 1997, I believed that the euro would include initially only EU members with solid finances, high productivity and strong economic performance. Alas, kingdoms like Denmark, Sweden or the UK refused to become part of it. Instead, who would have thought at the time that Mediterranean countries like Greece, Portugal, Spain or Italy would be included in the first wave ? This should have happened, in my view, a decade or two later, only after the euro had been tested by international markets and after southern countries would have significantly improved their economic performance, in a bid to qualify for membership. The fact that the euro’s introduction happened the way it did lends credibility to the theories according to which the planners knew about the flaws, but hoped to use an eventual future crisis to align the EU to the US federal model. Whilst by 1997 the need for another solid reserve currency was more than evident, it made little sense, if any, to draw so many EU members into the project at once, as it has now become clear to all.

And yet, the solutions to the current crisis – be it the shrinking of the euro or even the dismantling of the common currency area – would not, in my view, irreversibly damage the European Union. The proverbial prosperity and stability the continent enjoyed for the past sixty years would not be shattered because the planners went the wrong way about the euro. Both China and the United States, as well as Japan – not to mention weaker EU member states and surrounding neighbours – have become reliant to a high degree on the world’s equivalent of the honey bee, our very own EU. As much as we like to criticise it, or on occasion dismiss it as a cumbersome non-state actor, the European Union is here to stay, even if – and probably just because – it is not simply a version of American-type federalism on the European continent.

Author : Spotlight on Geopolitics
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E.U., Economy & Euro  , E.U., economics, euro

The euro: tough sanctions not the answer

 October 24, 2010

The recent Merkel-Sarkozy compromise regarding penalties against EU states which ring up big budget deficits has been attacked by German coalition partners, experts and the press for being too mild on offenders. In an article published on Europe’s World (“Designing a new institutional architecture for the eurozone”), Mr. Jurgen Stark, executive board member of the ECB, had endorsed strong punitive measures against those who break the Growth and Stability Pact convergence criteria. He is not the only expert to endorse strong automatic sanctions for offending states. But how wise, for example, would it be politically to suspend the voting rights of states for finding themselves in financial difficulty ?

Before the euro’s introduction, its supporters had to contend with strong opposition to European monetary union not only from the US, the UK and Japan, but also from Germany. Germans were loath to renounce their beloved deutschemark and German economists even challenged the right of Germany to adopt the EMU in court.

Now that the euro has proven its usefulness and value, a small group of countries within the EU, which includes Germany, Finland and the Netherlands, wants to use strongarm tactics against weaker monetary union partners in order to rein in their budget deficits and reduce their public debt load. Alas, not all 16 members of the monetary union have trade surpluses, most even have to run current account deficits in order to import German goods. Requiring financial rectitude and dispensing punishments to those who do not comply , highlight German insensitivity to the problems experienced by the economies of EU countries other than their own.

This is not to say that EU members should not behave in a financially responsible manner, be transparent in their finances and accountable in their actions. I am simply saying that clobbering them for experiencing financial difficulties will not entice others to join the euro-club. Making the rules too rigid or adopting unreasonable sanctions could see the euro remain the currency of a small group of countries, regardless of how beneficial a common currency is.

The 3 % budget deficit target was agreed upon at Maastricht when the European economies were booming. Its main proponents were representatives of countries whose stringent fiscal management is the exception within the EU, and not the rule. From the start, however, the 3 % target was an over-optimistic benchmark that did not factor in any potential for economic turmoil down the road. Before the launch of the monetary union, I had sensed that the 3 % deficit target was going to be a major problem once the boomtime would be over, and I wrote so at a conference on the EMU in 1997, advocating for a flexible budget deficit target. This is because some EU countries could indeed achieve balanced budgets, while others – because their economy is weaker – chronically run a budget deficit. Here, a compromise, not a German-type diktat is needed in establishing a deficit target of, say, some 5 % of GDP, making the European Union accommodating to all, not only to a few.

To complement that, an IMF-type institutional arrangement should be arrived at within the EU, which would combine incentives and financial assistance with stringent reporting rules and measures aimed at mandating member-states to behave in a fiscally responsible manner. The sanctions in case of non-compliance, to be sure, could not include half-evicting member states, by suspending their voting rights. Going down that road, the Union would run the risk of remaining with only one member – Germany…

Realistic deficit and public debt targets, as well as a carrot-and-stick approach to enforcing fiscal discipline across the Union are what we actually need. What we do not need are tight-fisted central bankers and closet disciplinarians who take their own countries’ exceptional budgetary situation as a yardstick for us all.