The Euro's unhappy birthday

The Eurozone's unhappy birthday is a reminder that poilitical projects pursued by ideological fanatics cause misery for ordinary people. But don't expect Brussels to learn from its mistake. Just expect more misery to come

Too much of a bad thing
Tim Hedges
On 8 January 2019 07:35

Towards the end of the year, television programmes, other than the ubiquitous repeats, tend to be assessments of what has gone on in the last twelve months, which can be summed up by Brexit and Meghan Markle. After that they are about what will happen in the next twelve months (same topics).

It was one of these I was idly watching when they asked a panel of people what disasters lay ahead. A couple said China (which is what I would have said) but one said Italy and I thought ‘here we go again’. If I had a euro for every crisis forecast centred on Italy I could have paid off the national debt and solved the problem.

The euro celebrated 20 years at the turn of the year. Opinion is mixed as to its success. I should have said that the fact that the gap between rich and poor, north and south, east and west has widened, when it was supposed to have narrowed, rather point to it being an abject disaster.

Italy has difficulty selling its goods because it has an overvalued currency, whereas for Germany the euro is undervalued, producing massive exports and a vast surplus which it chooses not to spend in Italy.

Other people say the euro has done very well just surviving. When it appeared, I gave it ten years. The Nobel Laureate Milton Friedman gave it five years. It seemed on such shaky foundations that a gentle puff of wind would blow it away.

But the euro has survived, even the strong winds of 2010-2011, and talk now is of whether anything the markets have to throw at it could stop it now. It is said that its principal weakness is the lack of a banking union and this is where Italy comes in.

Under normal circumstances if a country is perceived to get itself into trouble and has difficulty renewing its debt, it goes for a restructuring, putting off the repayments for a long, long time. Greece will still be repaying its debt at the end of this century.

But something like seventy percent of Italian debt is owned by the Italians themselves, foremost amongst them the banks. As the paper they hold declines in value, the banks come up against their minimum capital ratios and cannot lend any more, causing a recession. Then the banks go bust.

Italy’s GDP growth went negative in the third quarter of 2018 and if, as seems possible, it is negative again in the fourth quarter, Italy will be in recession.

Carige, the Savings Bank of Genoa, went bust at the turn of the year.

A restructuring? It would hit Italian savers hard, but it could be done, although probably not without assistance from the Eurozone institutions. This will not at present be forthcoming because the Eurozone wants Italy to avoid trouble by sticking to the rules. So Italy might only be able to resolve its crisis by pushing itself to the brink, risking disaster.

This is what the panellist meant by citing Italy as the greatest threat.

Of course, some commentators believe the euro will collapse under the weight of its own contradictions. But I think this is wishful thinking. It is confirmation bias: the system ought to collapse, therefore it will. But how?

Now the thing is twenty years old, young voters have never known anything else. Politicians went into the euro because they did not have the courage to admit their economies weren’t up to it. They will never campaign on the promise of leaving the monetary union, admitting they can’t hack it inside.

So Europe seems stuck with the euro, with all its unfairness. Italy has enjoyed zero growth since it joined, and the prospects do not look bright.  Perhaps that restructuring, or Berlusconi’s old parallel currency wheeze, is beginning to look better. Anything but this.

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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