You can’t turn Italians into Germans with a piece of paper
Charles Moore in the Telegraph:
In this week of great events in Europe, it was something small that really caught my eye. In an article about the problems of the euro, the German magazine Stern advised readers to check their euro banknotes. The notes issued in Germany, it explained, begin their serial numbers with “X”; those issued in Italy begin with “S”. Hold on to the former, was the suggestion, and get rid of the latter while you can.
Being the proud possessor of 60 euros from a recent visit to France, I hurried off to check my little pile of pictures of long bridges stretching across our continent, and was relieved to find mostly reassuringly Teutonic “X” notes, one “Z” and two “U”s (is that France?). Phew, no “S”.
Stern’s X-factor advice was based on the idea that the euro zone might break up. When the euro began in 1999, it was glorious for Italy, Spain, Portugal and (prospectively) for Greece. Their interest rates halved. Boom followed. But those countries had not abolished their inflationary habits when they abolished their currency, and now they had lost their old remedy of devaluation. As a result, their competitiveness is collapsing. Italy’s competitiveness against Germany has fallen by a quarter since 2000.
In creating the Euro, they should have remembered that Currencies are People Too. There was an entire philosophy of life contained in the Italian lira, and it was hardly consistent with the one embodied in the Deutschmark. Our view has always been that countries are not going to change their personalities, behaviors, and outlooks just because some bureaucrats think it is a good idea. The Euro can survive only if it adapts to the countries it serves, not the other way round — e.g., allowing an Italian devaluation. But of course that replaces the reality of the Euro with a Pretend Euro.
On a side note, doesn’t the monetary bureaucracy of the EU seem sneaky to you? Why not mark an I for Italy, an F for France, etc., unless you are trying to hide something? Was this the scenario that they feared from the beginning?
UPDATE
Lex echoes a number of our thoughts in the FT:
When is a euro not a euro? If the Italian government abandoned the currency, Italians might wake up one morning to find their euros were no longer the same as those in German pockets.
This is only one of the imaginative leaps required when contemplating a forced Italian devaluation, but the practical challenges involved do not rule it out.
Italy was fond of devaluations in the early 1990s as a quick-and-dirty way of improving competitiveness. European monetary union membership has given its leaders another easy out, as lower interest rates lightened Italy’s debt burden without any improvement in fundamentals.
But the time for easy outs is over. Growth will be below 1 per cent this year. With growth this weak, public sector debt will balloon from its current 106 per cent of gross domestic product. A fall in real wages to improve competitiveness is one of the few adjustment choices available, but an unlikely one for a government facing elections in the next year.
The lack of domestic policy options, or the will to consider them, make devaluation a more likely outcome.