As Italy takes the Eurosceptic baton from BRexit, now being the first officially “populist” government, sure to cause an even bigger headache for the EU, the turmoil of the last few weeks is sure to be repeated throughout Europe as the issue that set it off are sure to provoke more right turns ahead.
What broke the EU camel’s back so to speak was the coalition between Anti-establishment and anti immigration parties. This new development which ignores the false left right paradigm which the mass media and establishment use to keep a hold on power and suppress the people, could augur in sweeping regime changes throughout Europe. All that is required is for traditionally left wing groups to wake up from their politically correct induced slumber.
The popular coalition that won this last election had proposed to make Paolo Savona, an economist who has said Italy should have a “Plan B” to exit the euro, the finance minister. Sergio Mattarella, the country’s president appointed by the previous left wing government, vetoed the appointment. After initially insisting on Savona, the anti-euro populists have found a different job for him. Markets calmed, and the new government proceeded to form itself with another “safer” economics minister in place.
Being the EU’s gatekeeper in Italy, Mattarella was right that talking about a Plan B undermines the euro, but he ironically suggested that the country deserves to have that question front and center in an election before deciding it. A Referendum? Italexit? Indeed Savona was also right that Italy made a mistake in entering the euro. And while leaving now would be extremely disruptive and costly, the country would be well-advised to have at least a quiet contingency plan for leaving in the long term.
Savona slightly overstated matters when he called the euro a “German cage”, but the only real microeconomic benefits to Italy, as it has been to other participating states is the lowering transaction costs (mainly exchange rates) in its trade with neighbors, and encouraging tourism and investment.
But having a common currency for all the countries in the euro area was assumed to mean having a common monetary policy for them, too. That central monetary policy has worked out poorly for Italy — and, yes, far better for Germany.
David Beckworth, a visiting scholar at George Mason University’s Mercatus Center, tried to show that the European Central Bank’s policies have tended to be a better fit for the countries at the core of the European Union rather than at their periphery. However Italy is a founding member of the EU and the third largest economy in EU, and Italy has the third most gold reserves in the World! (Possibly something the EU oligarchs are interested in inquiring by enforcing debt on Italy?).
Beckworth’s analysis employs the Taylor Rule, a measure of the appropriate target interest rate for a country based on its inflation rate and the difference between its potential and actual economic output. The ECB’s target rates were much closer to what the Taylor Rule prescribed for core countries than for peripheral ones. Monetary policy was too loose in the peripheral countries during the boom that preceded the economic crisis of 2008-9, and too tight thereafter.
Monetary policy can also be judged based on whether it stabilizes the growth of spending throughout an economy. By this measure, too, the ECB served Italy badly. Before the crash its spending grew faster than Germany’s, and after the crash it has grown more slowly — and sometimes even fallen. The wild swings are marks of counterproductive monetary policy. Declines in spending are especially damaging. They raise debt burdens and require painful, and typically long, periods of labor market adjustment.
Variation between regions was inevitable. If ECB policy had been perfect for Italy, it would have been destabilizing for Germany.
While specific ECB policies are open to criticism — it was too tight for the whole region in 2010 and 2011, for example — the root problem is the common currency itself and the common policy that comes with it. The policy portion is something that was imposed on Italians by outsiders. Most Italians, according to polls, want to stay in the euro itself, perhaps because of its undoubted microeconomic advantages.
For many Italian voters, no doubt, the ideal arrangement would be for the country to continue to reap benefits from the euro while getting unconditional bailouts from other countries. But they are not the only actors in this drama who have inconsistent and unrealistic, though understandable, preferences. The new government however seems to understand that policy must be separated from currency.
Germany wants to keep both enforced debt (bailouts) and inflation to a minimum while sticking with the single currency. Even if the euro muddles through for now, it will generate future crises. Italy should hold an exit plan in its back pocket. So should other countries…