Finland Times

 

 

Was Italy better off before the introduction of the euro?

 

Italy's economy has lurched back into recession in recent months, and as is often the case when times are tough, nostalgia for the lira, Italy's currency from 1861 until the euro was formally introduced in 2002, surfaces. Some corners -- including some authoritative voices -- are even calling for Italy to ditch the euro and reintroduce the lira.

 

It's easy to understand why the idea is attractive. Since 1996, when the lira stopped floating freely against other currencies in preparation for the introduction of the euro, Italy's economic growth has trailed that of the European Union as a whole all but three years (it is expected to trail the EU growth rate again this year, the 15th time in 18 years).

 

Adjusted for inflation, Italy's economy is now about 105 percent the size it was on Jan. 1, 1997, while the U.K., which stayed out of the common currency, is nearly 150 percent the size it was at the start of 1997, according to information from British commentator Ambrose Evans-Pritchard.

 

With the lira, Italy could allow the currency to weaken to make exports more attractive. The pain of paying wages and debt in the strong euro currency is particularly evident in Italy's less developed southern regions, where industry must compete -- mostly without success -- for price-sensitive manufacturing work against companies in China and other parts of Asia, as well as former Soviet bloc countries still using their own currencies.

 

According to Antonio Guglielmi from Mediobanca, Italy was more successful in competing in manufacturing sectors before the lira was pegged to Germany's Deutschemark in 1996. In a research note, Guglielmi noted that the current "negative productivity spiral" started in the late 1990s.

 

Ahead of May's vote for European parliament, several populist political parties, including followers of comic-turned-activist Beppe Grillo, mentioned the return of the lira as a possibility.

 

And Evans-Pritchard said that Italy will only be able to emerge from its decade-and-a-half economic malaise by abandoning the euro and bringing back the lira: "It is an incontrovertible fact that Italy's [economic] disaster coincides with European Monetary Union membership," Evans-Pritchard wrote in August.

 

Opinion polls generally show that 20 to 30 percent of Italians are warm to the idea of bringing back the old lira, usually around half the number who say they support sticking with the euro (the remainder are either undecided or would not state their opinion). The lira crowd is a minority, but a sizeable and vocal one.

 

But despite the nostalgia for the old currency, few predict it will actually happen and most detailed analysis concludes that ditching the euro would be disastrous for both Italy and for the countries that stuck with the common currency.

 

"I supported adopting the euro when that debate was going on [in the 1990s], but I suppose there's an argument to be made that Italy might have been better off staying outside of the common currency from the start," Renato Pulci, a retired economic and rector from the University of Sicily, told Xinhua. "But the idea of going back now, after so many years, it's a ridiculous notion."

 

Franco Pavoncello, president of John Cabot University in Rome and a frequent commentator on political issues, agreed.

 

"The political system of this country is such that a figure like Grillo is seen as a political force rather than as a comedian," Pavoncello said in an interview. "In that context, who would have faith in the lira today?"

 

Last year, private bankers Hildebrandt and Ferrar ran a study showing that interest on public debt -- which closed this week at 2.44 percent for the benchmark ten-year bond -- would quickly skyrocket to above 20 to 25 percent (its was usually around 20 percent with the lira in the early 1990s) if the lira returned, as investors would seek protection against a likely devaluation. That would drive interest rates for credit higher, making most home or car purchases or corporate expansion too costly. Wages would also lose value as the currency weakened.

 

Italy's current debt of nearly 2.2 billion euros (2.7 billion U.S. dollars) would remain euro-denominated, making it nearly impossible to pay back with a constantly weakening lira. Bank accounts for Italian individuals and companies would get shifted to countries with stronger currencies, destabilizing the country's banking system. The euro would probably suffer as well, on fears that other countries might follow suit.

 

"Everything the European Central Bank has done in the last two years to loan money to troubled European economies, stabilize bond rates, and all the rest has been to make sure a single small economy like Greece wasn't forced out of the euro zone," Pulci said. "It would be an unmitigated economic disaster if a big one like Italy did it voluntarily. It's a nice idea to daydream about. But that has to be the extent of it."