“Italy despairs of euro” - in normal times it would be front page news

Se vogliamo che tutto rimanga com'S, bisogna che tutto cambi": "If we want things to stay as they are, things will have to change." That aphorism from Giuseppe Tomasi di Lampedusa's incomparable novel, The Leopard, sums up the Italian approach to life better than anything else I know.

The setting of the novel is Sicily at the time of Italian unification, and the words are uttered by Tancredi, the favourite nephew of the magnificently decadent nobleman whose nickname - il gattopardo - provides the title of the book. While the incorrigible "Leopard" can only watch irascibly but impotently as the nationalist revolution sweeps away the old order, Tancredi resolves to ride the modern wave - even if it means marrying beneath his station and sullying his hands with party politics. But only in order that things can stay as they are. Which, of course, in Sicily they largely did.

It was in much the same spirit that Italian politicians in the mid 1990s decided Italy should scrap its currency, the lira, and become a member of the European Monetary Union. They did so in the firm belief that this one monetary change would allow everything else in Italy to stay as it was. It is now apparent that this was a fond illusion. In June the Minister for Welfare, Roberto Maroni, dropped a small bombshell by calling for a return to the lira. "The euro has to go," he declared in an interview. "It has caused devastating price increases and made the Italian economy uncompetitive." He and his party, the Northern League, are calling for a referendum on the issue.

Some commentators dismiss Maroni as a mere maverick. But last week the Italian Prime Minister, Silvio Berlusconi, endorsed his position, calling the euro a "disaster". The single currency, he added with characteristic finesse, "has screwed everybody". Wait a second: the Italian Prime Minister publicly denounces the euro? Shouldn't that have been front page news? Well, a year ago it would have been. But one of the many side-effects of a terrorist bombing campaign is to distract public attention from almost every-thing else (aside, of course, from Test match cricket). I suspect that even if Germany invaded Poland it would merit no more than a paragraph near the bottom of page six.

The Italian turn against the euro does not, it should be stressed, mean that the single currency will fall apart tomorrow, devoutly as some Eurosceptics would wish to see that. Both Maroni and Berlusconi have their eyes on next year's elections, which it is quite possible that their four-party coalition will lose. In any case, there is no exit clause in the treaty of Economic and Monetary Union. Unilateral secession of the sort the Italians seem to be contemplating would have unforeseeable but certainly high costs as investors fled Italian assets and shunned whatever "new lira" the Bank of Italy printed.

On the other hand, economists have long suspected that if anything could crack the edifice of EMU it would be an Italian defection. When I was a research fellow at the Bank of England in 1999, one of the Bank's economists wrote a confidential paper about a hypothetical "Break-up of the Euro Area". The most likely cause of such a break-up, he argued, would be withdrawal by a certain "Country I".

It is no mystery why "Country I" is now behaving just as he predicted. The single currency was supposed to boost growth but, since 1999, the Italian economy has not merely ground to a halt, it has gone into reverse. According to the latest quarterly figures, Italian gross domestic product is falling at an annual rate of 1.8 per cent.

How far can this recession legitimately be blamed on the euro? The obvious answer is that Italian exporters have fallen victim to the currency's recent strength. In the two years from February 2002 the euro appreciated by nearly 50 per cent against the dollar; only in the past few months has it shown signs of weakening. Nothing is easier than for Italian politicians to accuse the European Central Bank of being too slow to cut interest rates - especially now that it is run by a Frenchman. Yet this will not quite wash. For one thing, Messrs Maroni and Berlusconi are conveniently forgetting that it was the euro that saved Italy from a looming fiscal crisis. In the mid-1990s Italy's public debt was the highest in Europe at 125 per cent of GDP; interest payments were consuming ever more of the government's budget. Then, at a stroke, EMU cut Italian interest rates by half. That, indeed, was the principal reason the Italians went for the euro in the first place - because it promised to give them German interest rates. And it delivered.

But that was really all the Italians wanted of the euro. In true gattopardo style, they only changed their currency so that everything else could stay as it was. It has. The Italian economy remains wedded to old-fashioned manufacturing exports - of shoes, clothing and furniture - leaving it far more exposed to competition from Asia than Britain's more service-oriented economy. The Italian labour force is still the most idle in Europe. Employment is a miserable 55 per cent of the total labour force, compared with more than 70 per cent in Britain. Average working hours per year are also among the lowest in the developed world.

Yet Italian wages keep on rising - by 3 per cent in the past year, five times the German rate. Italian productivity, on the other hand, lags behind. According to the Organisation for Economic Cooperation and Development, it grew just 0.5 per cent a year in the past decade, compared with 1.6 per cent in Germany. The result is that Italian unit labour costs have risen 17 per cent since the euro was introduced. The German figure is just 1 per cent.

Meanwhile, Italian business continues to enjoy official protection from foreign competition. It emerged last month that the governor of the Italian central bank, Antonio Fazio, blocked the Dutch bank ABN Amro's bid for a small Italian bank in favour of the Banca Popolare Italiana. Thanks to a wiretap on Mr Fazio's telephone, we now know that the chief executive of BPI called to express his thanks. "Ah, Tonino, I'm moved," declared Mr Fiorani. "I'd give you a kiss right now, on the forehead, but I can't." Only in Italy.

Equally unreconstructed is Italian public finance. It is now clear that the reduction of Italy's budget deficit in the late-1990s was a purely temporary expedient to ensure that Italy qualified for EMU. Already the EU expects this year's deficit to exceed 3 per cent. But Mr Berlusconi has just announced a package of tax cuts that could push it above the 5 per cent mark. With a total debt burden that still exceeds 100 per cent of GDP, Italy is starting to look like Argentina (North). Mr Berlusconi insists he can balance the books by means of privatisation. But it is not clear what he has left to flog after a decade of public sector flotations.

To compound all these problems, Italy faces the most serious demographic crisis of all the EU economies. By 2050, according to the United Nations, more than a third of Italians will be 65 or over, roughly double the current proportion. Increased longevity and the recent collapse in Italian fertility are to the prime culprits.

Cherish those memories of Italy as a country of narcissistic young Lotharios, buxom mamas and multitudes of bambini. The Italy of the future is an old folks' home.

Once upon a time, the Italians could carry on in this feckless fashion and then, whenever the going got too tough, simply devalue their currency. That, if you recall, was why lira prices generally ended in a string of zeros. But so long as Italy retains the euro, devaluation is not an option. Don't get me wrong. Though I prefer the Celtic periphery to Chiantishire in August, I adore Italy - precisely because it has managed to avoid so many of the changes that have made the rest of Europe ugly and charmless.

But if the delightful things about Italy really are to remain unchanged, something more than monetary musical chairs is now needed. To change currency once in the space of six years is unfortunate. To do so twice would look like negligenza.
 

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