Italy, France, and the madness of the Euro

It is just possible that France will elect two candidates in the first round presidential elections who want to pull out of the euro. Italy, which is flat on its back due to a euro massively overvalued compared to its fundamentals, can only srcratch its head. Meanwhile, the lunacy will have to end some time

A pile of very damaging euros
Tim Hedges
On 21 April 2017 08:49

The first round of the French elections is nearly upon us, and the Italians are looking over their north-west border with horror, tinged perhaps with wistful admiration.

It seems there is just a chance of the two loony candidates, Le Pen and Mélenchon, facing each other off in the second round. Predictions in the Italian press are to the effect that this would lead to the end of the euro, the end of the European Union, the end of the world. Italy is horrified.

Of course, Italy has had its brush with eccentricity, as a recent widely publicised clip shows: Silvio Berlusconi is seen implausibly campaigning against the slaughter of lambs at Easter. Some unkind wags have suggested he was in fact cuddling the attractive (and vegetarian) Michela Vittoria Brambilla, his former Animal Welfare Minister, and the lambs were photoshopped in.

But Italy does not embrace eccentric policies. Silvio may be odd, but he didn’t act oddly, he in fact did very little. Perhaps the difference with France is the way the Second World War is interpreted. Italy, despite finishing on the winning side, seriously -- blindly, even -- wants to redress the mistake of Mussolini.

I know a couple of Mussolini restaurants where old men tearily toast a past they think might have been better. But nobody takes them seriously. The constitution is centred around a fear of power, unlike the Fifth Republic’s constitution which makes the French President more powerful than an African dictator.

No Italian could say, as Le Pen did of the roundup of Jews at the Vel d’Hiv ‘It wasn’t us’.

And then there is the euro, opposed by both Le Pen and Mélenchon. It is of course opposed by Italian political parties, indeed by a majority, but few here suppose that Italy might seriously leave the euro.

This despite most economists saying that Italy cannot survive for long with an exchange rate probably at least 30 percent overvalued. The hope here is that the Germans will allow European Bonds (ie Italy borrows with a German guarantee), a banking union (where German banks cover for Italian ones) and a European Deposit Guarantee (where German depositors bail out Italian ones).

And yet there is this blinding truth that Italy cannot survive with an overvalued currency. What happens if the Germans make it clear, and they already have, that they will not participate in this grand bailout? Could Italy leave the euro, as so many of its politicians say they would like to, but don’t really mean?

The answer lies in the events nearly 25 years ago. In Britain, the AFL (forerunner to UKIP) had campaigned that the Exchange Rate Mechanism was damaging to Britain and could not survive, but John Major won a handsome victory in April. By the summer, the pound was under threat, the government only able to bleat euro-loving platitudes.

By September the pound and the Italian lira were forced out of the ERM and both devalued by 20 percent. And here is the story. The UK, with its flexible labour markets following Mrs Thatcher’s reforms, began to see its exports surge and saw a lengthy boom, cashed in on by Tony Blair and Gordon Brown five years later.

Italy stayed stagnant, still having a clientelist economy, a succession of governments hindering foreign investment, and a sclerotic labour market.

The Italian political economists of today have seen this and know it well. If Italy left the euro, to survive it would have to remove the blocks to success. Gone would be the regulations which stop supermarkets selling non-prescription drugs, meaning paracetamol is twenty times the British price.

The taxi drivers, the lawyers (more lawyers in Rome than the whole of France, and the French have too many), the petrol stations (the most expensive in Europe) would all have to be exposed to the market. The State, with its insatiable appetite for regulation and jobs for the boys, would have to be cut back.

The golden pensions for the people whose faces fit (I know a man who is still working but claiming a state pension of €840,000 a year) would have to go. The Chairman of Perugia’s bus company earns twice what Theresa May does.

All this would have to stop, and, frankly, stopping it is too much trouble. The people who matter would never agree. So it won’t happen. Italy would far rather France elected a lunatic and took the blame for the euro.

The changes will have to happen some time, though.

Tim Hedges, The Commentator's Italy Correspondent, had a career in corporate finance before moving to Rome where he works as a freelancewriter, novelist, and farmer. You can read more of his articles about Italy here

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