20 years after euro’s birth, Italy is still trying to adapt

ROME (Xinhua) – Many Italians spent yesterday recovering from a loud night of celebrations to welcome 2019. More quietly, the day also marked the 20th anniversary of the euro currency, which has created its own hangover for the Italian economy.

Statistics from the European Central Bank (ECB) show that Italy is one of the two, the other being Spain, from the original group of 11 eurozone members which have seen their economies shrink since the currency was created. All told, Italy is on pace this year to see less economic growth than the European Union as a whole for the seventh consecutive year and for the 18th time in 20 years.

Not surprisingly, polls regularly show the common currency garnering less support in Italy than in the 19 countries now using it. Nostalgia for the lira – Italy’s currency from 1861 until the introduction of the euro – is on the rise.

But economists and expert analysts told Xinhua that Italy’s economic woes began before the euro came into being, though the currency likely magnified the economy’s weaknesses.

“In terms of productivity, Italy’s economy started to fall behind most other European economies in the mid-1990s,” Economist with Bocconi University in Milan Francesco Giavazzi said in an interview.

“The Italian economy has three times as many small businesses as Germany, even though Germany has a bigger economy,” Giavazzi went on. “As the world became more competitive, the small companies had a much harder time adapting.”

Fireworks explode in the sky over Rome’s Colosseum during New Year’s celebration. – AP

Founder and Chief Economist with LC Macro Investors Lorenzo Codogno told Xinhua that the introduction of euro made it harder for the economy to mask its defects. Before the euro, the government could help exports remain competitive by periodically devaluing the currency. That tool was no longer available with the euro.

“Devaluing a currency is like a strong drug,” Codogno said. “At first it makes everything better. But then it’s terrible.”

Earlier in December, Mario Draghi, the Italian economist who is President of the ECB, praised the euro at an event in the Italian city of Pisa, saying the currency was an “exceptional” response to a “century wrecked by dictatorship, war, and misery.” But Draghi also admitted that some countries, such as Italy, benefitted less from the euro.

Though the common currency was not legal tender until 2002, its creation was marked from Jan. 1, 1999, when the 11 original users fixed the exchange rates of their currencies against each other. Greece joined that group in 2001, meaning the currency went into use in a dozen countries a year later.

Both Giavazzi and Codogno said the currency has had some advantages for Italy. Interest rated on government debt fell dramatically once currency risks were removed from the equation. A common currency also made cross-border partnerships easier, and allowed for the free movement of capital and labour. But both also agreed that the net impact for Italy was probably negative.

Head of macroeconomic forecasts with REF Research Fedele De Novellis said Italy could have benefited more from the euro if it had made the right structural reforms leading up to the unveiling of the new currency.

“There was a great deal of political will to make reforms that would allow Italy to join the common currency,” De Novellis told Xinhua, adding, “But there was not enough political will to make the changes needed to ready the economy for a new level of competition.”

Codogno predicted that the poor trends for Italy would continue, with political leaders including the government of Prime Minister Giuseppe Conte still shying away from the steps needed to improve the competitivity of the economy.

“Government after government in Italy have opted for short-term fixes rather than systematic reforms,” he said. “The current government is even undoing some of the few useful reforms of the past for political gains.”