European View

The euro is certainly not the origin of our evils

by Ignazio Angeloni

IT
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Dear Editor-in-Chief,

Luigi Zingales’ appeal for a “meaningful and constructive” debate on the euro (Il Sole 24 Ore, 16 April) came as a surprise to me. Let me say, first of all, that I have known Zingales for several years and that in the past have welcomed some of his academic contributions in the financial domain; I also know that he has recently been criticising the euro and the European Union. Thus, what doesn’t come as a surprise to me is the call aimed at the academic community or the implicit invitation to discredit, through analysis, preconceived notions about the irreversibility of the single currency and Italy's membership of the euro area.

What is surprising is that the appeal has been launched without telling the unsuspecting reader that this issue has for decades been the subject of endless debate, without any consensus ever having been reached on the economic analysis. Milton Friedman (University of Chicago) started it in the early 1950s, when currencies were fixed worldwide, with a study in which he asserted the advantages of flexible exchange rates.

A few years later, Robert Mundell arrived, also fresh from studying in Chicago, with another paper in which he showed that, in certain circumstances, a system of fixed exchange rates was preferable. Mundell was then called, perhaps inappropriately, the “father of the euro.” Since then the debate has come to a virtual standstill, without the huge quantity of data generated in support of the two arguments ever having been able to settle the dispute.

The political dimension has been articulated more clearly. From the post-war period (or, rather, from 1971, the date that marks the end of the global system of fixed exchange rates) until today, European countries have constantly sought, albeit with difficulties, to stabilise exchange rates in the firm belief that fluctuating currencies were an obstacle to the Single Market and to the broader project of integration and cooperation in Europe.

The creation of the euro, the achievement of that aspiration, was not only formally approved by all countries, but supported by a large majority of the European public in surveys: when the euro was introduced it was supported by 84% of Italians (Eurobarometer survey), which was one of the highest figures in the euro area. Today, the approval rate in Italy is lower than in the other countries (where it is picking up), but it nevertheless remains above 50%.

Although remaining sceptical about the possibility of resolving the question by following the rules proposed by Zingales, I share the passion for a dignified debate of ideas. I also think that, at a time of division and disorientation in the country, it is the duty of those who, in different ways, work on these issues professionally to rethink their beliefs and present them clearly, so that they can be understood and judged. For this reason, I have explained my ideas on the euro and on Italy's continued membership of it in a paper which was published today in a collection of essays by various authors on related issues. For the sake of brevity I shall merely summarise a few thoughts.

Italy experienced its “golden age” (as Gianni Toniolo called it), with annual growth rates of over 5%, in the 20 years after the war, when exchange rates were fixed. From the 1970s, when the lira underwent a steady and dramatic devaluation, the so-called “decline” gradually took over.

Does this mean that high rates of growth are automatically obtained by fixing the exchange rate? Evidently no. Other factors, both then and now, played a role. This simple fact should make all those people reflect who believe solely in currency devaluation as a way of stimulating growth in the “long term.”

Some critics of the euro then take the United States as an example – a country which, unlike the euro area, they claim is endowed with institutions that allow monetary union to function – redistribution mechanisms, a federal budget, a full banking union, and so on. Those critics ignore the fact that the United States introduced those mechanisms over a century ago after adopting the dollar, and after a civil war, many financial crises and the Great Depression.

Ironically, Randall Henning, an expert on the US’ integration story, has described European integration, by comparison, as being a “very polite” historical process.

In recent years, after Mario Draghi announced that he would use all the tools available to defend the euro and after the European Central Bank conducted its expansionary monetary policy, economic growth in the euro area (except for Italy) has settled at around 2% per year; in Italy it is around 1%. Spain, which experienced a major crisis and had to call for international aid, is growing by over 3% today.

Euro membership entails rules and constraints, but these simple examples should trigger reflection among those who see the single currency as a cage in which only Germany thrives and who believe that Italy’s stagnation is the result of the euro and not of our country’s intrinsic problems. We should focus on them and not look for distractions.

I wish Zingales and Il Sole 24 Ore a fruitful debate on these important matters. But I do not wish readers of this newspaper to become citizens of a country that might take the unwise step of detaching itself from the euro and the European Union. Neither of these two is perfect: we have to work together, from the inside, to improve them.

Ignazio Angeloni is Member of the Supervisory Board of the European Central Bank

Il Sole 24 Ore Editor in Chief Guido Gentili replies:

We are certain that the debate on Italy and the euro is and will be fruitful given the high level of expertise of those contributing to the discussion. Naturally, we too are among those who hope we won’t witness any sort of attempt to detach Italy from Europe and the single currency Rather, we strongly oppose this sort of scenario. It is precisely because neither Europe nor the euro is perfect, as you rightly point out, that we have to work together, from inside, to improve them.


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