Daily Telegraph: An Italian exit from the euro might be the end of the single currency

You might think that it would be fitting if the European Union were to come to a sticky end because of Italy. After all, the agreement that established the entity that we now call the European Union was signed in Rome.

For several decades after that 1957 treaty, Italy was one of the strongest supporters of the European project.

Having endured first fascism and then, after the war, unstable and ineffectual government, it suffered none of the angst about the loss of sovereignty that plagued British debates about joining the European Community. Moreover, in the early years of the union, Italy prospered. At one point its GDP overtook the UK’s, an event that was widely celebrated in Italy as “il sorpasso”, the surpassing, or, if you like, the overtaking.

But the overtaking did not last long. Indeed, since the euro was formed in 1999, the Italian economy has grown by a mere 9pc, or less than 0.5pc per annum. Over the same period, the UK economy has grown by 42pc.

This recent disastrous economic performance, plus mounting anxiety about inward migration and the fact that the EU has left Italy to cope with this huge influx on its own, has changed many Italians’ attitudes to the EU. Understandably. These failings go to the heart of the EU project.

The truth is that Italy should never have joined the euro in the first place. And it isn’t only Anglo-Saxon euro pessimists such as myself who believe this. At the time the German Bundesbank was appalled at the idea that Italy should be admitted. After all, even then it had a huge public debt and a history of high inflation offset by frequent currency depreciation.

How could it possibly function well in a monetary union with Germany? The euro optimists argued that once in such a union, Italy would adapt. Yet, having lost competitiveness relative to Germany in the years immediately after the monetary union was formed, during the long years of austerity and disappointing economic performance since, Italy has made no improvement whatsoever compared to Germany.

Meanwhile, the World Economic Forum‘s index of labour market flexibility puts Italy well below most of its fellow eurozone members. In fact, its ranking is sandwiched between Iran’s and South Africa’s.

Hawks in the German economic establishment have little sympathy for Italy’s plight. They argue that it must intensify the reform effort. They have a point. By no means everything that is wrong with Italy can be laid at the doors of the EU or the euro. The problems of labour market inflexibility and the weakness of the political and legal systems are deep-seated.

Yet, starting from where Italy is, you cannot reform yourself into competitiveness. There is widespread resentment towards Germany, in particular in regard to its ultra-tight and uber-orthodox fiscal and financial policy and its persistent tendency to run a huge current account surplus that effectively sucks aggregate demand away from other countries. This surplus is currently running at 8pc of GDP, even though euro rules posit a limit of 6pc.

To read Roger Bootle’s piece for the Telegraph in full, click here.

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