FRONT PAGE – Who’s afraid of the euro?

The 15th anniversary of the euro entering circulation hardly warranted a mention. In 2002, I headed the secretariat of Italian Foreign Minister Renato Ruggiero. I remember how the lack of enthusiasm shown by Silvio Berlusconi’s ministers as the single currency made its historic entrance marked the end of Ruggiero’s participation in that government, announced in an explosive interview in La Repubblica.

To this day, the news circulating about the currency union is almost never backed up by objective data. For example, there is a widespread belief that the single currency raised prices.

It is true that with the introduction of the euro, many prices were bumped upwards, partly due to the unjustifiable inefficacy of the economic authorities responsible for market controls, which should have overseen compliance of lira-euro exchange rates in order to avoid speculation. However, taking Italy as an example, it is also true that while inflation stood in double figures during the 1970s, ’80s and ’90s (averaging 11.5% a year with peaks higher than 20% at the end of the ’70s), Italian inflation was negative in 2016 (-0.1%). Another outrageous misconception is the claim that with the introduction of the euro, the member states have lost sovereignty over their currency. Marine Le Pen in France and Beppe Grillo in Italy don’t say (or worse, don’t know) that before the euro, monetary sovereignty was nothing less than an illusion because European countries shaped each other’s currency exchange rates, and national monetary authorities usually ended up following in the footsteps of the most stable currency (generally the German mark). By adopting the euro, those countries actually gained rather than lost sovereignty because they had the chance to appoint a member of the ECB’s Steering Committee. Therefore if Banque de France or the Bank of Italy returned to their national currencies, their formal sovereignty on paper would not be what matters, but rather the credibility afforded the currency by the rest of the world. 

Finally, a mantra of euro-sceptics is that returning to a national currency would increase exports. There is no denying that the immediate impact of devaluation would benefit exports, but the advantage would soon be wiped out by the unavoidable rise of inflation due to the devaluation itself. Entering the devaluation-inflation spiral is certainly not a way that European countries can hope to export more. What they need is an increase in productivity. As proof, consider that since 1979 German productivity has increased by 84% compared to 43% in Italy. Moreover, a currency with a flexible exchange rate would certainly be subject to speculative attacks. The economic councillor of the Front National has explained that once France left the euro, it would join the ‘currency snake’. Unfortunately the currency snake experience (if memory serves me correctly) was not a success. It lead to a strong tendency for capital to move abroad due to the fear of seeing one’s savings converted into a currency that is bound to devalue. When Italy and its currency were subjected to repeated speculative attacks in the 1990s, the lira would suffer double-digit collapses (-20% in 1992) despite its being part of the European Monetary System. Therefore, those who presume that one can recover sovereignty by leaving the euro should be upfront with their electors and start talking about the costs. According to a study published a few weeks ago by the French think tank Institut Montaigne, the likely damage to French GDP if Paris decided to leave the monetary union would be -2.3% per year and 9% long term. The Front National candidate, Marine Le Pen, has nevertheless announced that this move would be subjected to referendum if she wins the upcoming presidential elections (not that it’s very likely).