Article / 12 April 2017 at 15:57 GMT

Has Italy fallen out of love with the euro?

Managing Partner / Spotlight Group
United Kingdom
  • Italy has fallen behind Germany and France since the euro was launched
  • Debt is running at 133% of GDP, which is unsustainable.
  • Italy's standard of living is no higher than that of Slovenia
  • Increasing numbers of Italians are questioning the euro

Colosseum
 Italian support for Eurozone membership is not quite in ruins, but 
seems to be crumbling. Image: Shutterstock

By Stephen Pope

Since 2009 the Eurozone has faced serious threats to its ability to remain intact. The troubles in Greece are well documented, and to a lesser extent the problem of Portugal on the western flank has also stirred emotions from time to time.

What is becoming more troubling with each passing day is the realisation that a greater risk is to be found right at the centre of Europe, in the third largest economy, namely Italy.

Not only has the county appeared ungovernable at times, with a virtual revolving door at the prime minister’s office, but now two recent reports pull no punches in revealing how the Italian population feels about the single currency.

The findings are rather grim. The first report implies that Italians perceive themselves as being poorer, worse off, under the rigour of the euro, and the second suggests the same people see their living standard increasingly falling behind that of citizens in Germany and France.

Now I am not suggesting that the Italians will actually vote to leave the Eurozone, but they will be watching and gauging their own economic circumstances over the summer and so it does not require a great leap of imagination to see the Italians building up a pressure cooker of contempt for the European project.

Despair over debt

Italy recorded a government debt equivalent to 132.7% of GDP in 2015. When the euro came into force in 1999, the Stability and Growth Pact stipulated that debt to GDP should not exceed 60% over the economic cycle. Well, Italy has completely flouted that rule; since 1999 the lowest the debt-to-GDP level has been is 100%, and the average is 109.5%.
Italy Debt Source: Eurostat 

There is a groundswell of political opposition against the single currency. The increasingly influential 5-Star movement wants to dump the euro through a referendum. It has enjoyed a surge in opinion polls and was up to 30%+ in a March Corriere Della Sera poll.

They are not alone, as the anti-European Union Northern League was on 12%. It is not beyond the realms of rationality to see opposing political parties band together if Italy had an “in/out” referendum in the future.

Before the Italian people vote to leave the euro, they would need to reflect deeply on whether the currency and its strictures have been good or bad for them.

Montecitorio palace in Rome
 Rome's Montecitorio palace, home to the Italian parliament. 
Photo: Shutterstock

A December report from Eurostat looked at GDP per capita, and, if all Eurozone nations began at an index base of 100, Germany rose 24% while Italy sank by 13%.

This would imply that Italy must now count its standard of living as being more on par with the Czech Republic, Slovakia and Slovenia rather than similar to Germany or even France where GDP per capita has remained nearly stagnant at just +5%.

To be blunt, the Italian people are worse off. They are poorer than they were in 1999 when the euro was introduced or even 2002 when the lira finally gave way to euro notes and coins.

Getting worse

The growth performance of the Eurozone has been poor. By comparison that of Italy has been dismal. At least Greece and Spain had booms before their painful busts. Germany and France have managed to claw back much of the ground lost in the deep recession of 2008-09.

However, Italy's GDP per capita is just 4% higher than it was 18 years ago. The economy is still smaller than it was in 2008 when the financial crisis took hold. Unemployment is at 11.6%, and labour market participation is low. When it comes to unfulfilled potential and being the real laggard, Italy is the standout case.

Findings this month from research group World Economics suggest Italy's problems from its currency linkage with Germany are increasing. Germany has become much more competitive as a member of the Eurozone.

Over the past two years, the "Italian euro" i.e. what a euro in Italy can buy has fallen 10% versus the “German euro”. That means Italian businesses exporting to Germany (12.1% of all Italian exports) compete at a clear disadvantage and now face worse conditions than previously. It also means that German imports are cheaper and therefore more competitive domestically.

World Economics suggests that Italy is a new fault line for the Eurozone: "...Italy looks like becoming the next domino to suffer from the strength of the German economy as trends [...] have become much more pronounced over the past 12 months...”

Italy’s manufacturing sector is dominated by small companies, many family-owned. These businesses have been reluctant to invest, have proven to be poor at innovation, and were slow to adopt new information technology when it took off in the 1990s. Productivity has increased less rapidly than in Germany or France.

And furthermore Italy has tended to specialise in low-cost manufactured goods, a segment of the global economy dominated by China against whose low wages Italy cannot compete.

Italy’s competitiveness problem is not new. Since 1945 the country has tended to have higher costs and higher inflation than rival economies. This was masked until it joined the euro as Italy was able to restore competitiveness by devaluing the lira, which made exports cheaper.

That option no longer available, and, with annual GDP growth struggling to reach 1.0% and with capital investment in business and infrastructure declining, one can understand why an increasing number of Italians tell pollsters the euro is a not a good thing.

Italian restaurant
 An "Italian euro" buys less than a "German euro"
Photo: Shutterstock


— Edited by John Acher

Stephen Pope is managing partner at Spotlight Ideas


3y
vanita vanita
Dear Steve,
When you closed your oil trade please comment over here after closing.
Take care.
3y
Stephen Pope Stephen Pope
Not till 55
3y
vanita vanita
Ok steve thanks
3y
Blange Blange
Nicely written Stephen and sad for my distressed country
3y
massimorusso massimorusso
I am agreed with your comment, in particual on the poorly of SMEs

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