Is the euro a problem? A look at its role in Italy’s drama
FRANKFURT» Italy’s political turmoil has roiled global financial markets this week and raised questions about the country’s future as a member of Europe’s shared currency, the euro.
Some in Italy and other countries in the 19-member currency union have complained about the euro, saying it has made life tougher economically.
Here’s a quick look at the euro and why it’s in the spotlight again.
Q: Why is the euro an issue in Italy’s political crisis?
A: Italy’s economy has grown very little since it adopted the euro as a founding member in 1999. Some blame the euro rules that limit government spending and deficits, which can stimulate growth.
Many economists, however — a number of them Italian — say the country has failed to make its economy more competitive. It is held back by corruption, excessive bureaucracy and high labor costs. That makes Italy an expensive place to locate a business and makes its exports less competitive.
Daniel Gros, head of the Center for European Policy Studies, says Italy’s troubles are homemade but psychologically hard for some to accept. He said that the “impact of corruption and pervasive conflicts of interest on growth, and economic performance in general, is diffuse and difficult to pinpoint.”
“It is thus understandable that the euro has become a scapegoat,” he said. Q: All that has been true for years. What has made the euro an issue this week?
A: Italy’s anti-establishment 5-Star Movement and anti-immigration League party have each flirted with the idea of leaving the euro and regaining complete control over fiscal and monetary policy.
The two parties won enough votes March 4 to form a government. But that stalled after President Sergio Mattarella rejected their proposal for an economy minister whose writings have entertained the idea of leaving the euro. Mattarella said that such a drastic idea needed to be debated openly during a campaign, not brought in through the back door. Mattarella’s move helped put the euro front and center, with the prospect that any new elections would be explicitly fought as a referendum on the euro.
Q: Could Italy leave the euro?
A: Yes, but it’s considered unlikely.
For one, despite it all, many Italians don’t want to. A poll from Oct. 2017 showed 45 percent of Italians thought the euro was good for their country and 40 percent thought it was bad.
And the possible consequences of leaving are sobering. Investors, fearing their holdings of stocks or real estate might be switched into a new Italian currency that would be worth less, would sell, causing markets to plunge. Italian companies could get into legal disputes with foreign suppliers about what currency to pay in.
Bankruptcies and lawsuits would spread. Italian’s euro savings would be worth less. Growth would suffer.
Q: If it’s so unlikely why did markets take fright this week?
A: The fear is that a government that runs bigger budget deficits and flouts EU rules, as the two populist parties suggested they would do, might scare off investors from lending the government money. That would raise the cost Italy pays to borrow money from international investors. The main market reaction this week was a jump in Italian borrowing rates.
Extremely high borrowing costs could force Italy to default on its debt.
Another reason for concern is Italy’s size. It’s the third biggest eurozone economy, too big to fail and too big to bail, as the saying goes.
The likelihood is small but the consequences would be large.