In June, I attended a public talk about the Euro currency. Two speakers were invited representing two opposing opinions with regard to the Eurozone: the senator Paolo Guerrieri and the professor Alberto Bagnai. Even though senator Guerrieri thinks that adopting the Euro was an error, he claims that Italy should not leave the Eurozone now. On the contrary, professor Alberto Bagnai thinks that my country should abandon the Euro as soon as possible because he strongly believes that the single currency is the major cause of the severe economic crisis we have been experiencing for almost twenty years.
A public debate about this matter is going on in Italy. The speakers well represent two of the three main opinions on the table[1]. The matter is terribly complex not only for the ordinary people but for the economists as well, so much so that largely different opinions exist in the academic world. In any case, I think that, after listening to the arguments of the different positions, some objective facts can be isolated.
From the purely financial standpoint, the Euro has given us a tremendous advantage in terms of passive interests on the public debt (this is often referred to as the Euro-dividend). This has allowed Italy to save billions of Euros, although our public debt is one the largest in the world (as % of the GDP). Supporters of the single currency claim we should have used these savings to modernize the country. Instead, we have wasted these resources in a poor-quality public expenditure as described in this previous post.
Even if adopting the Euro currency was a mistake, leaving the Eurozone today would be extremely difficult. As soon as rumors about this possibility started to circulate, we would witness a nation-wide bank run. The Italians, in fact, would withdraw most of their liquid savings [2] in order to move them abroad or to keep them in cash because they would afraid of a massive devaluation of the new currency. This would mean the collapse of the entire banking system, as Greece painfully experienced a couple of years ago.
On the other hand, there are several serious arguments in favor of leaving of the Euro currency as well. For example, forcing economies so different to use the same currency is a stretch which “violates” a fundamental principle of the free market. Likes any other good, the currencies are subject to the demand and offer law. Consequently, when it comes to the international trading, they act as a sort of automatic regulatory mechanism to settle the balance of payments across the countries. In fact, when the demand for a good produced by a country increases, the value of the currency of this country increases too because the buyer needs to get that currency to complete the purchase. However, the increase in the value of the currency makes, in turn, the good less competitive. In an ideal world, this mechanism would lead to an overall balanced trade across the countries[3]. Today, the Eurozone is not an example of a balanced trade. The Germany balance of trade shows this situation very clearly. Who criticizes the Eurozone claims that Germany leveraged the single currency—which is too weak with regard to the strength of the German economy—to increase exports remarkably. To keep their products competitive, economically weaker countries such as Italy have had to compress the purchasing power of the workers, as the adjustment mechanism of the value of the currencies can’t help anymore[4].
Another relevant matter related to the adoption of the Euro is the fact that the states can not issue the currency anymore to finance their expenditure. Instead, they have to borrow the money from the capital markets. This means that they are subject to the judgment of the investors which determine the interest rate associated with the debt. In other words, this judgment is an assessment of the risk associated with the public debt securities issued by those governments. Of course, the countries which have a huge public debt/GDP ratio have to pay a greater interest rate. Currently, this problem is mitigated significantly by the quantitative easing policy carried on by the European Central Bank (ECB). The minute this ends, the interest rate of the large public debts such as the Italian one will explode again and the governments of these countries will have to take serious measures like the Italian one did in 2011.
As stated before, I think that there are strong arguments on both sides and it is virtually impossible to establish, with certainty, which is the best thing to do for my country. The economists who are in favor of leaving the Eurozone sustain that this would be the right choice on the basis of the theory of optimum currency area. However, as the name suggests, this is a theory. The economists should realize that the Economics is not an exact science like Mathematics. As it is a social science, it is heavily influenced by the human factor which is by definition unpredictable and irrational[5]. As such, any economic recipe might work in one context and may not in a different one, it being influenced by the history and the culture of the population living in the area where it is applied.
Even though this debate regards the currency only, to some extent it can be generalized with respect to the construction of the entire European Union which today is questioned from many quarters as well.
Regarding the Euro, it is difficult to establish a definitive truth, as there are rights and wrongs on both sides. However, I think that the creation of the Euro currency—and, more generally, of the European Union as we know it today—is questionable from the cultural, historical, and political point of view above all else.
Similarly to the EU, the single currency is an attempt to homogenize all the European countries, in order to create a sort of continental (federal) state. Nevertheless, the history of the European people teaches us that there are still huge differences in terms of languages, cultures, and lifestyles among the countries of our continent. I think that imaging a single European country is just unrealistic. The identities—even within the same country, as shown by the recent events in Catalonia—are still strong and there are no grounds for such a project.
With regard to the European policies, the decisions that have a major impact on the people’s lives (such as the adoption of the single currency) were taken without a thorough public debate. I think that this is a misinterpretation—or perhaps even an intrinsic limit—of the representative democracy which should not be meant as an unrestricted delegation. In other words, our representatives, although they were elected legitimately, should have held a referendum to approve the decision to join the Eurozone.
That being said, I think that it is in the public eyes that the EU just doesn’t work. It is unacceptable, in fact, that any of its members is forced to live in the conditions Greece is getting through. Nevertheless, I believe that we should not abort the European project. Rather, we should learn from our mistakes and we should think about a different form of union, where the value of the collaboration among the countries is maximized but where the respect of the specific identities is preserved at the same time. How to pursue these goals? I think we should forget about top-down rigid rules and we should rather start from huge transnational projects that are out of reach of the individual countries and from which all the European states could benefit. Working collaboratively on such projects would allow developing a strong cohesion by operating side by side to achieve common goals. A successful example of this approach is the CERN laboratory which I visited (for free) in 2014.
Here, people from all the European countries—actually from all over the world—work together on one of the largest projects in the history of mankind. No country would be able to make the effort required to build and develop this gigantic laboratory where numerous scientific discoveries and technical inventions have been made, like the world wide web you are using to read this post.
A redesigned European Union built around these principles would provide an immense value added to the individual countries and the European citizens because it would show the people, by practical examples, the results our continent would be able to achieve, thanks to the combination of the different and complementary cultures it is made of.
Notes
[1] The third is maintained by those who think that adopting the Euro was the right choice and it is still the best option for my country. Former president of the European Commission Romano Prodi is, for example, a member of this group.
[2] Italy has still one of the top household savings per capita:
- https://en.wikipedia.org/wiki/List_of_countries_by_wealth_per_adult
- https://data.oecd.org/hha/household-savings.htm
[3] To pursue this goal, Keynes and Schumacher proposed a specific unit of account for the international trades, named bancor.
[4] Paradoxically, to further increase the competitiveness of its products, Germany chose to squeeze on wages, too. This choice led to the creation of the mini-jobs. Today, this phenomena involves almost 5 million people. I think that the success of the extreme right Alternative für Deutschland party in the recent federal elections is strictly related to this situation and it worryingly reminds of the rise of the Nazi party in the last century.
[5] It’s is no coincidence that Laurence J. Peter coined this definition:
An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.
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