Will Italian exit see the end of the euro?

Italy’s Government wants radical change to its economic programme but its impact may be felt across the EU

You might think 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 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 fascism and then, post-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.

And in the early years of the union, Italy prospered. At one point its GDP overtook the UK’s.

But the overtaking did not last long. Since the euro was formed in 1999, the Italian economy has grown by a mere 9 per cent. Over the same period, the UK economy has grown by 42 per cent.

This disastrous economic performance, plus anxiety about inward migration and the fact the EU has left Italy to cope with this influx on its own, has changed many Italians’ attitudes to the EU.

The truth is Italy should never have joined the euro in the first place. At the time, the German Bundesbank was appalled at the idea that Italy should be admitted. Even then it had a huge public debt and a history of high inflation offset by frequent currency depreciation.

The euro optimists argued that once in such a union, Italy would adapt. Yet, having lost competitiveness relative to Germany in the years after the monetary union was formed, Italy has made no improvement compared to Germany.

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 resentment towards Germany, particularly in regard to its ultra-tight and uberorthodox fiscal and financial policy..

So it is hardly surprising the new Italian Government should want radical change. Its economic programme amounts to a fourfold

It has long seemed to me that Italy is the euro’s major weakness

assault on European orthodoxy.

It proposes a sort of flat tax that would amount to a substantial tax reduction, a sort of universal basic income (UBI), and the reversal of pension reforms that would oblige workers to retire later.

The new Government’s proposals may widen the public deficit by about 6 per cent of GDP, putting it close to 8 per cent. At that rate, without a surge in growth or inflation, the ratio of Government debt to GDP, which is currently running at 130 per cent, would start to take off.

Perhaps the most intriguing aspect of the Government’s programme is the possible issue of what could amount to a parallel currency, known as “mini-bots”.

This is significant because the issue of this monetary instrument would be under the direct control of the Italian authorities.

By contrast, without such a ruse, while Italy is still shackled to the euro, as with every other member country, the Italian monetary authorities have no scope for independent action.

This new currency could make it easier for Italy to leave the euro.

It has long seemed to me that Italy is the euro’s major weakness. Greece came close to exit in 2012, but it is sufficiently small that its problems were fudgable. But Italy is a different kettle of fish. It is a much bigger economy untroubled by any geopolitical threat. Its problems are not readily fudgable and its new leaders are not so easily intimidated.

If Italy were to leave the euro, I feel sure after an initial loss of confidence and doubtless a fair bit of chaos, the nation would repeat the feat that it has staged before, namely an export boom brought on by a devalued currency, coupled with a surge in domestic demand boosted by fiscal stimulus.

Of course, Italy’s fundamental problems would remain but the prospect of a burst of good growth will be difficult to resist.

I am not sure whether a new Italian Government will hold its nerve.

When the crisis finally comes, often the disintegration occurs far more quickly than anyone could imagine.

Is this the story of Italy and the euro? And could the same even apply to the EU itself?