Should Italy leave the euro

Italy in permanent crisis: "Of course the euro is the problem"

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They sat together for a full twelve hours, members of parliament and supporters of the five-star movement of comedian Beppe Grillo, economists and those interested in politics, to argue and discuss. The topic of the event at the beginning of July in the Italian Parliament was a question: What would Italy bring if it left the euro?

The meeting attracted worldwide attention from investors. The London-based financial services provider Eurointelligence reported on this in a newsletter that is sent to tens of thousands of bankers. The euro exit debate in Italy is not so interesting because it is so new, it says in the letter, but because it is suddenly being conducted in public: "It is not possible to be more public than in parliament."

A change has taken place in Italian society in recent months. So that there is no doubt: The majority of the population and economists are still of the opinion that an Italexit is not a good idea. But while in the past only right and left exotic people discussed whether Italy should leave the euro, the debate has now gripped society as a whole.

People like Antonio symbolize this change particularly well. Antonio is an analyst at one of the largest Italian investment banks. Its job is to evaluate financial markets. He belongs to the country's business elite. "Of course the euro is the problem," says Antonio. And: "It's not just my opinion. It's a fact."

In contrast to the debt crisis that started in 2010, when Greece, Portugal and Spain hardly got any credit overnight, Italy's misery is taking place in silence. The gross domestic product per capita is now lower than when the euro was introduced in 2002. The reason for this is a miserable development in productivity.

Misery in silence

Labor productivity has stagnated since the mid-1990s, when the lira was no longer allowed to devalue against other European currencies. The industry produces less today than in the mid-1990s. The unemployment rate is the third highest in the EU. Some economists, especially in Germany, argue that Italy's problem is not the currency but the unsolved problems in the banking sector. But the economic downturn began at a time when the banks were still doing well. Therefore, there are indeed many indications that the common currency has significantly exacerbated Italy's problems.

One idea to end the drama is therefore to exit the euro. Alberto Bagnai from the University of Pescara is one of those economists who promote Italexit. He has just presented a study simulating what would happen if the country left the euro. The result: After five years, Italy would be better off economically than it is today thanks to a strong depreciation of the lira against the euro (more than 20 percent). Exports would rise because Italy's industry would be cheaper compared to Germany's.

High bank debt

But what about the debt? Italy has a mountain of debt of more than 130 percent of its economic output. Only Greece and Japan are even more indebted. A warning is that Italy would slide into chaos after the euro exit because of these obligations, because the country would have to pay off euro debts in lire. More than two thirds of the debt is held by its own banks, citizens and the central bank in Rome. The state could convert these into lira. If the lira devalued, Italy's debt burden would therefore fall in real terms. What the state gains from it, it would lose because of the remaining euro debt. According to an analysis by Mediobanca, the euro exit would be a zero-sum game for debt levels.

But new problems would arise: The debts of Italy's banks abroad amount to 670 billion euros - that's twice Austria's economic output. The credit institutions would only be able to survive under this burden after a euro exit if the state absorbs them. In order to prevent citizens from carrying their money abroad before the lira expires, capital controls would also be necessary.

Call for more leeway

In order for the lira not to lose value completely, the central bank would have to raise interest rates to attract investors, says the Viennese economist Vladimir Gligorov. That would make loans more expensive for companies and make investments more difficult. Many economists warn that the profit from the currency devaluation could fizzle out. So there are also good reasons to fear the euro exit.

Italy should not leave the euro, but push for the rules to be changed: this is an alternative idea that analyst Antonio also supports. Italy needs to become more competitive, he says. Taxes and duties on labor should fall, the state should encourage innovation. That costs money. Italy's deficit would soar to four or five percent of economic output in a transition period, Guglielmi believes. "Germany also had significantly higher deficits while the Hartz IV reforms were carried out." However, the fiscal rules in the Union have only recently been tightened, and a relaxation does not seem realistic. The Germans benefit from the current system, so they will do a devil to change it: This is how Antonio sees it.

Parallel currency for the country

Another alternative in the country is actually being discussed as to whether Italy should introduce a parallel currency. Silvio Berlusconi's Forza Italia, the Lega Nord and the Five Star Movement expressed sympathy for such ideas. The concepts are vague. Basically, it is about the state issuing credit to companies that invest diligently. Companies can use this to settle tax debts in two or three years. In the meantime, the credits could be used as a means of payment - like a currency.

The idea behind it is that you can pump money into the economy via parallel currency to stimulate the economy without violating the deficit rules of the euro area. Local experiments are already being carried out with alternative currencies, for example in Sardinia there is the Sardex, which entrepreneurs on the island have developed and use. A similar private initiative also exists in Naples. But such experiments are still different than when the finance or economics ministry started to hand out vouchers. It is unclear to what extent such ideas would be compatible with EU law.

How seriously these debates are to be taken will show in the coming months at the latest - when the election campaign in Italy begins. At least the forecasts have gotten a little better recently. Economic growth could climb above the one percent mark, estimates the central bank in Rome on Friday. Some economists see this as a first sign that euroscepticism is exaggerated and that the country is doing better than expected. The opposite position is: If Italy can no longer generate growth despite low oil prices, low interest rates, a weak euro and the recovery in the rest of Europe, something must go fundamentally wrong in the country. (AndrĂ¡s Szigetvari, July 17, 2017)