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OPINION AND ANALYSIS | 02-06-2018 10:56

Convertibility, European-style

In Italy, the two biggest political groupings, the Five-Star movement and the nationalistic Liga think the time has come to either make the euro more like the lira or to stop using it.

Days after Argentina dumped ‘convertibility,’ the face-saving version of dollarisation that Domingo Cavallo used to put a quick end to a hyperinflationary firestorm, the Italians, evidently unimpressed by the disaster that had befallen the country to which so many of their compatriots had emigrated, happily started swapping their lire for euro banknotes and coins.

Like their Argentine cousins almost a decade earlier, they assumed that as their own politicians had shown themselves to be incapable of managing the national currency properly it would be far better to let others do the job. Economists who tried to disabuse them were given short shrift.

While convertibility lasted, the value of the peso was set by the US Federal Reserve. In the case of the euro, the outsourcing of responsibility for interest rates and the like has been less evident – as luck would have it, the president of the European Central Bank, Mario Draghi, happens to be an Italian – but the principle is much the same. So too have been the consequences.

As proved to be the case here, monetary stability brought many benefits in the short term, but as the years passed the disadvantages mounted. Italy’s gross national product is barely two percent bigger than it was two decades ago before the euro made its entry. A growing number of Italians say the euro is to blame. That may be a half-truth at best, but there can be little doubt that it contributed to the stagnation of what had once been a vigorous economy.

Convertibility came to a disastrous end because Argentina had yet to reach a stage in which her rulers would no longer feel the need to devalue the currency from time to time. The same can be said about Italy. For years now, Italians have felt that a far weaker euro would be helpful, but the Germans, who have the last word on the subject, treat their complaints with contempt. Their willingness to lecture the Italians on their un-Teutonic shortcomings does not go down well.

Despite strong public support for Cavallo’s brainchild, here the strain of living with the US dollar eventually became unbearable. Overnight, devaluation became patriotic. In Italy, the two biggest political groupings, the Five-Star movement led by a stand-up comedian and the nationalistic Liga which, among other things, wants to boot out half a million illegal immigrants, think the time has come either to make the euro more like the lira or to stop using it.

As we all know, putting an end to convertibility was a very painful business, but at least Argentina could go about it without the government of the day getting overruled by some higher authority. Nobody in Washington told the Peronists who took over after president Fernando de la Rúa left the scene that, whether they liked it or not, the currency board arrangement was here to stay and any attempt to get rid of it would simply not be tolerated by the US government, the markets or the all-powerful credit-rating agencies.

While in other parts of the world it was widely agreed that nailing the notoriously flighty peso to the relatively strong US dollar had always been a bad idea, in Europe many strongly believe that the euro is what is holding the European Union together and fear that its demise could bring the entire edifice crashing down.

Among those who think this way is Italy’s president, Sergio Mattarella, an elderly gentlemen who, to the astonishment of those who thought his role should be merely decorative, vetoed the appointment of a finance minister who, like dozens of mainstream economists, disapproved of the euro and on occasion has had harsh words for Germany’s part in the ongoing drama.

Just how the Italian public will react to Mattarella’s behaviour remains an open question. Many suspect it has made people even more determined to tell the Brussels bureaucrats where to get off than they were before he told them that investor confidence mattered far more than their freely expressed political preferences. Should new elections be called, the notion that Italy is being treated like “a colony” by the financial markets, as irate leaders of the Five Star brigade and the Liga put it, could win the rebels even more votes that they got in March when they routed the old guard.

When plans to cement the European Union by persuading its members to adopt a single currency were being mooted, respected economists warned that for the scheme to work monetary union would have to be accompanied by a banking union plus mechanisms to ensure that areas experiencing a boom did not prosper at the expense of those undergoing a slump. In other words, richer countries like Germany should have to foot the bills piled up by their poorer but far less frugal partners. It was also suggested that, before going ahead, the Eurocrats should wait until the very different economies of Germany, France, Italy, Greece and the rest of them had converged enough because otherwise the enterprise would come to an unhappy end.

Such advice was brushed aside by true believers in the “European project” who insisted that a single currency would guarantee the success of their endeavours by removing the differences between northerners and southerners. They are still at it; like communists when the Soviet Union was falling apart, they insist that, despite appearances, their scheme is working well and speak scornfully of those who point out that, far from binding countries together “in an ever closer union” the euro is driving them apart.

The more enthusiastic take heart from the standard view that, up north, things are chugging along nicely, though German’s recent growth rate of less than one percent a year does not encourage optimism. However, in the south, the human costs of the euro experiment have been horrendous; a generation of young people has been sacrificed, with unemployment for them reaching 50 percent in some areas. The only consolation, if that is the word, is that, should the Italians decide to escape from the monetary cage they locked themselves into almost two decades ago, they could suffer a fate similar to that of millions of Argentines after the country broke free from convertibility

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James Neilson

James Neilson

Former editor of the Buenos Aires Herald (1979-1986).


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