Italexit, berriz ere!

Joseph Stiglitz-en How to exit the eurozone

Italy is right to consider leaving the EU’s common currency area.

(https://www.politico.eu/article/opinion-italy-germany-how-to-exit-the-eurozone-euro-reform/)

Zipriztin batzuk:

(i) Erreforma?1

(ii) Alemania eta euroguneko arazoak2

(iii) Zergatik irten, exit?3

(iv) Nola irten, exit?4

(iv) Moneta paraleloa?5

(v) Kostuak eta onurak6

Moneta paraleloa Italiarako

A parallel currency for Italy is possible

Rome can regain control of its monetary policy without breaking the rules of the eurozone.

Biagio Bossone, Marco Cattaneo, Massimo Costa and Stefano Sylos Labini
Members of the Group of Fiscal Money

(https://www.politico.eu/article/parallel-currency-italy-possible-eurozone/)

The Group of Fiscal Money has been active in developing and promoting a dual-currency scheme

(i) Joseph Stiglitz-en artikulua7

(ii) Diru Fiskaleko Taldea eta bonoak8

UEUko blogeko Italexit delakoaz

Mosler bonoak erabiltzea, Molser-ek planteatutako irtenbideetako bat da, beste bat Italexit izanik, noski. Hona hemen UEUko blogean afera honetaz dauden sarrera batzuk:

Italexit, lehentasuna

Bill Mitchell ere Eurexit delakoaz aritu da: EUREXIT dela eta, gomendioa

Eta bereziki Brexit-ez. Ikus, oro har, hauxe: Brexit-ez, hitz batzuk

Hona hemen azken lana: Bill Mitchell-en Italy should prioritise an exit of the Eurozone madness

(http://bilbo.economicoutlook.net/blog/?p=39705)

(i) Mitchell-ek Joseph Stiglitz-en aurreko lanak kritikatzen du9

(ii) Ezkerra eta Stiglitz10

(iii) Neoliberalismoa nagusi, baita Ezkerrean ere11

(iv) Azken kritika12

(v) Stiglitz eta eurogunea13

(vi) Alemaniaren rola14

(vii) Nazioarteko lehiakortasuna15

(viii) Stiglitz zuzen dago zenbait puntutan16

Therefore, these geniuses conclude, Italy’s problems are not related to the euro.

What they don’t tell you is that the almost all nations have experienced a slowdown in productivity since the GFC. So Italy has not underperformed in that regard.17

Italy also has elevated unemployment rates and a young generation in danger of missing out on the usual pathways to adulthood as a result of its appalling growth performance and the fiscal policy settings that have caused it.

As Joseph Stiglitz noted:

The cost of persistent unemployment, especially among its youth, is enormous. Young people in their 20s and early 30s should be honing their skills in on-the-job training. Instead, they are sitting home idle, many of them developing a resentment toward the elites and the institutions they blame for their predicament. The resulting lack of formation of human capital will also dampen productivity for years to come.

True enough.

Ondorioak

(1) I remain of the view that Italy has to exit the currency madness. It is big enough to absorb the political shocks that would follow.

(2) But while Joseph Stiglitz is correct in saying that the Eurozone disaster is now undermining the entire European Project and introducing new problems that will escalate out of control.

(3) The problem for Italy is that these social instabilities are already advanced.

(4) Exit must become the priority for its Government.


Ingelesez: “(…) Italy’s new leaders are right that the eurozone is badly in need of reform. The euro has been flawed since its conception. For countries like Italy, it took away two key adjustment mechanisms: control over interest rates and exchange rates. And instead of putting anything in their place, it introduced tight strictures on debts and deficits — further impediments to economic recovery.

The result for the eurozone has been slower growth, and especially for the weaker countries within it. The euro was supposed to usher in greater prosperity, which in turn would lead to renewed commitment to European integration. It has done just the opposite — increasing divisions within the EU, especially between creditor and debtor countries. (…)”

Ingelesez: “German resistance

What needs to be done is well known. The problem is Germany’s reluctance to do it.

The eurozone has long recognized the need for a banking union. But Berlin has insisted on postponing the key reform — a common deposit insurance — that would reduce capital flight from weak countries: Capital flight was a key factor in explaining the depth of the downturn in the crisis countries.

Greece gave into being strangled by the European Central Bank. But it didn’t have to.

Germany’s domestic economic policies aggravate the eurozone’s problems. The key economic challenge faced by countries in a currency union is the inability to adjust misaligned exchange rates. In the eurozone, the burden of adjustment is currently imposed on the debtor countries, already suffering from low growth and incomes. If Germany had a more expansionary fiscal and wage policy, some of the pressure would be shifted off of these countries.

If Germany is unwilling to take the basic steps needed to improve the currency union, it should do the next best thing: Leave the eurozone. As George Soros famously put it, Germany should either lead or leave. With Germany (and possibly other Northern European countries) out of the currency union, the value of the euro would decline, and exports of Italy and other Southern European countries would increase. The major source of misalignment would be gone. At the same time, the increase in Germany’s exchange rate would go a long way to curing one of the most destabilizing aspects of the global economy: Germany’s trade imbalance.”

3 Ingelesez: “Why leave

The trouble, of course, is that Germany obstinately refuses to take either of the two paths forward. That leaves citizens in countries like Greece and Italy with a choice they shouldn’t have to make: between membership in the eurozone and economic prosperity.

A timid and inexperienced Greek government chose to stay in the currency union. The result was stagnation. By 2015 the country’s GDP had plunged 25 percent from its pre-crisis level. Since then, it has barely budged.

The challenge, of course, will be to find a way to leave the eurozone that minimizes the economic and political costs.

Italy has the opportunity to make a different choice. In the absence of meaningful reforms, the benefits for Italy of leaving the euro are clear, straightforward and considerable.A lower exchange rate will allow Italy to export more. Consumers will substitute Italian-made goods for imports. Tourists will find the country an even more attractive destination. All of this will stimulate demand and increase government revenues. Growth will increase, and Italy’s high level of unemployment (11.2 percent, with 33.1 percent youth unemployment) will decrease.

There are, of course, many other reasons for Italy’s malaise, and these will be at most only partially addressed by leaving the euro. Governments like those of U.S. President Donald Trump or former Italian Prime Minister Silvio Berlusconi — dominated by corrupt rent-seekers with no understanding of the true bases of sustainable long-term growth — do not provide the political leadership necessary for strong and sustainable growth.

At the same time, however, the slow and unequal growth that Italy has experienced as a result of the euro almost surely provides fertile ground for such populists.

There would be further political benefits too. A more prosperous Italy would be more likely to cooperate in other key areas in which Europe needs to work together: migration, a European defense force, sanctions against Russia, trade policy.

Trade or migration policies produce benefits for the entire country, but there are also losers — and the fiscal constraints imposed by the eurozone have made it all but impossible to provide those losers with adequate protections. An Italy outside the eurozone would be better positioned to share the benefits of its international polices, while mitigating the pain associated with them.”

Ingelesez: “How to do it

The challenge, of course, will be to find a way to leave the eurozone that minimizes the economic and political costs. A massive debt restructuring, carefully done, with special attention to the consequences for domestic financial institutions, will be essential. Without such a restructuring, the burden of euro denominated debt would soar, offsetting possibly a large part of the potential gains.

Such restructurings are a normal part of large devaluations. Sometimes it’s done quietly and obscurely — as when the U.S. went off the gold standard. Sometimes it’s done more openly, as in Iceland and Argentina, with debtors crying foul. But such debt restructurings should be viewed as an inherent risk of cross-border investing, one of the reasons that “foreign” bonds often yield a risk premium.

From an economic perspective, the easiest thing to do would be for Italian entities (governments, corporations and individuals) to simply redenominate debts from euros into new lira. But because of legal complexities within the EU, and because of Italy’s international obligations, it may be preferable to enact a super-Chapter 11 bankruptcy law, providing expeditious recourse to debt restructuring to any entity for whom the new currency presents severe economic problems. Bankruptcy laws remain an area within the purview of each of the nation states of the EU.

Italy could even choose not to announce that it’s leaving the euro. It could simply issue script (say government bonds) that would have to be accepted as payment for any euro debt obligation. A decrease in the value of these bonds would be tantamount to a devaluation. This would at the same time restore the efficacy of Italy’s monetary policy: Changes in central bank policy would affect the value of the bonds.”

Ingelesez: “Hue and cry

Of course, there would be a hue and cry from other members of the eurozone. Introducing a parallel currency, even informally, would almost certainly violate the eurozone’s rules and certainly be against its spirit. But this way, Italy would leave it to the other members of the eurozone to decide to expel it.

Rome could take the chance that the fractious members of the currency union would never take such strong action, since that would confirm the fraying of the eurozone. Then Italy would have its cake and eat it too. It would remain part of the eurozone but would have accomplished a devaluation.

And if Italy lost the wager, the political onus of its leaving the eurozone would be more clearly on its “partners.” They would be the ones who took the final step.

Greece gave into being strangled by the European Central Bank. But it didn’t have to. Athens was already well into creating the infrastructure (an electronics payment mechanism under the new drachma) that would have eased a transition out of the eurozone.

Advances in technology over the past three years make creating electronic currency systems all the easier and more effective. Should Italy choose to use one, it wouldn’t even have to face the difficulties of printing new currency.

Italy could also blunt some of the pain of its departure if it were to coordinate its exit with other countries in a similar position.

The motley group of countries that now forms the eurozone is far from what economists call an optimal currency area. There is just too much diversity, too many differences, to make it work without better institutional arrangements of the kind that Germany has vetoed.

A southern eurozone would be far closer to an optimal currency area. And while it would be difficult to arrange a coordinated departure in a short period of time, if Italy successfully manages its way out of the euro, others will almost surely follow.

6 Ingelesez: “Costs and benefits

To be sure, one shouldn’t underestimate the costs of a large devaluation. Any large change in a key price in an economy is a significant perturbation.

The price of foreign exchange is, of course, pivotal in any open economy. It has knock-on effects on the prices of all goods and services. Some — perhaps many — firms will go bankrupt. Some — perhaps many — individuals will see their real incomes decline.

But it’s equally important not to underestimate the costs of Italy’s current malaise. If Italy’s economy had spent the 20 years since the euro’s creation growing at the rate of the eurozone as a whole, its GDP would be 18 percent higher.

If the new Italian government were to successfully navigate such an exit, Italy would be better off. And so would the rest the Europe.

The cost of persistent unemployment, especially among its youth, is enormous. Young people in their 20s and early 30s should be honing their skills in on-the-job training. Instead, they are sitting home idle, many of them developing a resentment toward the elites and the institutions they blame for their predicament. The resulting lack of formation of human capital will also dampen productivity for years to come.

In an ideal world, Italy wouldn’t have to leave the eurozone. Europe could instead reform the currency union and provide better protection for those adversely affected by trade and migration.

But in the absence of a change of direction by the EU as a whole, Italy needs to remember that it has an alternative to economic stagnation and that there are ways of leaving the eurozone in which the benefits would likely exceed the costs.

If the new Italian government were to successfully navigate such an exit, Italy would be better off. And so would the rest the Europe.

7 Ingelesez: “In Joseph Stiglitz’s recent article for the POLITICO Global Policy Lab (“How to Exit the Eurozone,” June 29, 2018), the Nobel-prize wining economist proposes that Italy issue a parallel currency as a way to retake control of its monetary policy.

It’s an insightful idea, and one worth exploring. However, Stiglitz is wrong when he suggests that “introducing a parallel currency, even informally, would almost certainly violate the eurozone’s rules and certainly be against its spirit.

Ingelesez: “Our organization — the Group of Fiscal Money — has been very active in developing and promoting such a dual-currency scheme. We call it “Fiscal Money” and believe it could be used to avoid the uncertainties of exiting the euro while allowing Italy to recover economically without breaking any EU rule.

Our proposal is for government to issue transferable and negotiable bonds, which bearers can use for tax rebates two years after issuance. Such bonds would carry immediate value, since they would incorporate sure claims to future fiscal savings. They could be immediately exchanged against euros in the financial market or used (in parallel to the euro) to purchase goods and services.

(Gogoratu Molser bonoak, behean)

Fiscal Money would be allocated, free of charge, to supplement employees’ income, to fund public investments and social spending programs, and to reduce enterprises’ tax on labor. These allocations would increase domestic demand and (by mimicking an exchange-rate devaluation) improve enterprise competitiveness through a reduction in the cost of labor. As a result, Italy’s output gap — that is, the difference between potential and actual GDP — would close without affecting the country’s external balance.

Unlike Stiglitz’s conclusion, our proposal is fully consistent with the rules of the eurozone and might very well be a permanent set-up for the whole eurozone going forward.

Note that under Eurostat rules, Fiscal Money bonds would not constitute debt, since the issuer would be under no obligation to reimburse them in cash. Also, as non-payable tax assets (of which many examples already exist), they would not be recorded in the budget until used for tax rebates — that is, two years after issuance when output and fiscal revenue have recovered.

While we verified this debt-related issue extensively from both the legal and accounting standpoint, it is also important to add that the reason for not including non-payable tax liabilities (and Fiscal Money as such) in a country’s public debt calculations under the Maastricht treaty is a matter of substance, not just of form. The reason is that a non-payable liability does not bear any default risk due to the lack of repayment capacity from the liability issuer.

Based on conservative assumptions, we calculate that Italy’s GDP growth over the two-year time period would generate additional tax revenues sufficient to offset the tax rebates. Projections show that these would peak at around €100 billion per year, compared to Italy’s total government revenue of more than €800 billion. Thus, the cover ratio (that is, the ratio between government gross receipts and tax rebates coming due each year) would be large enough to accommodate for possible shortfalls due to future recessions.

In any case, safeguards would be provided within the law governing Fiscal Money to ensure Italy’s full compliance with EU fiscal rules. Such measures would consist of spending cuts and/or tax adjustments that would be triggered automatically in the event of fiscal underperformance, compensated by additional issuances of Fiscal Money in favor of those who would be otherwise hit by the fiscal adjustment. The high cover ratio would afford enough space for this.

By activating a Fiscal Money program, Italy would solve its output gap problem without asking anything of anybody. No European treaty revisions would be required. No financial transfers would be needed. Public debt would stop growing and start declining relative to GDP, thus attaining the EU fiscal goals under the Maastricht Treaty.

Have we found the philosopher’s stone? Certainly not — but in an economy with large resource slack, the multiplier works its effects largely on output and moderately on price. And if external leakages are contained (which increased competitiveness would do), the multiplier effects are the highest. Fiscal Money will mobilize unutilized resources, accelerate investments and induce banks to resume lending.

The downside is nearly nil. Even if Italy were to lessen its fiscal discipline and decide to over-issue Fiscal Money, only its recipients would take the hit; the value of dual currency would fall but the value of the euro would be unaffected. Nor would there be default risk on a default-free instrument.

In any case, the large cover ratio would make this scenario totally unlikely. Besides, it is only fair to remember that Italy’s inability to rein in net public spending is a false myth. Between 1998-2017, Italy was the only eurozone country to never run a primary budget deficit (other than in 2009). If anything, Italy has suffered from excessive public budget restraint, which has led to its dramatic output decline.

Unlike Stiglitz’s conclusion, our proposal is fully consistent with the rules of the eurozone and might very well be a permanent set-up for the whole eurozone going forward.”

Ingelesez: “And so it was of interest to read Joseph Stiglitz’s latest Op Ed on Politico – How to exit the eurozone (June 29, 2018) – where he seems to be firming in his previously less firm position on the Eurozone and advocating positions that I outlined above.

In his 2016 bookThe Euro : How a Common Currency Threatens the Future of Europe – Joseph Stiglitz was somewhat ambivalent.

In that book, he correctly concluded that the design of the EMU was flawed from the start and was certain to fail.

His assessment that a fundamental shortcoming was the lack of ‘federal’ institutions capable of dealing with asymmetric and negative economic shocks to Member States in addition to the persistent trade surpluses run by Germany at the expense of its EMU partners was sound reasoning.

I disagreed with his assessment as to why these fatal design flaws emerged.

He said that the EMU:

was created with the best of intentions by visionary leaders whose visions were clouded by an imperfect understanding of what a monetary union entailed.

I don’t think that assessment is correct.

As I argued in the 2015 book [n my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015)], Jacques Delors knew exactly what he was doing when he set up his committee to produce the 1989 Delors Report.

(…)

I think Joseph Stiglitz is in error if he attributes good intentions to those driving the process to Maastricht and beyond.

The key players had become infested with Monetarist and neoliberal ‘free market’ ideologies and wanted to further entrench those ideas into the political economic architecture of Europe.

I also think he was in error in that book by arguing that the the euro is worth saving. He advocated a “flexible-euro” system, with perhaps a “strong Northern euro and a softer southern euro”. He also wanted a more “social Europe” where the ECB targets “employment, growth and stability, not just inflation”.

As the UK Guardian review at the time (August 22, 2016) – The Euro and Its Threat to the Future of Europe by Joseph Stiglitz – review – concluded in relation to the German propensity to embrace these changes:

The chances of that happening in the near future are … zilch.

And that has always been the problem. What Germany requires to be part of the deal does not suit the vast majority of the other Member States.

However, it is not just the cultural proclivities of Germans that is the problem. As I argued in my 2015 book, to some extent Germany were dragged into the common currency by France, which thought it was a way that they could establish their pre-eminence in the European context.

The old French ambitions for its own grandeur!

The other reason that the Eurozone remains a total disaster and resistent to essential (root-and-branch) reform is that the political forces that have historically brought evolutionary change – the social democrats – have become infested by neoliberalism.

That is the thesis that Thomas Fazi and I explore and explain in out latest book – Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World (Pluto Books, September 2017).

And it is a theme that we will extend in our next book, which we are working on at present and hope to have published next year.

It is the Left that has allowed the Eurozone to morph into a corporatist, anti-democratic, neoliberal morasme.”

10 Ingelesez: “And there are no signs that fundamental shifts in Left-thinking in the European context is changing.

As an example, on September 22, 2016, the Green European Journal published an article – Why Joseph Stiglitz is Wrong – which was a review of Joseph Stiglitz’ book release (The Euro : How a Common Currency Threatens the Future of Europe) written by a so-called progressive Tunisian journalist Guillaume Duval.

Duval is an editor for the French monthly magazine – Alternatives économiques – that began life to counter Margaret Thatcher’s TINA mantra.

Its Wiki page says that its writers reflect a Post Keynesian slant and are critical of neoliberalism and “Le journal revendique explicitement une ligne éditoriale « de gauche »” That is, it reflects a ‘Leftist’ editorial line.

It also publishes material that is popular with the “membres du mouvement altermondialiste” (anti-globalisation movement).

So you might be surprised to read that Guillaume Duval thinks the euro was a vehicle to rescue Europe from neoliberalism.

Yes, you read that correctly.

In his sharp criticism of Joseph Stiglitz in 2016, Duval wrote:

What is irritating in this context, coming from a progressive economist like Joseph Stiglitz – and he is far from alone – is Stiglitz’s apparent misunderstanding of the political stakes of the matter: the euro is first and foremost a way to break with the neoliberal approach to the Europe market.

Yes, you read that correctly.

Duval’s argument is that the introduction of the euro transferred “a key element of sovereignty to the Union, allowing finally for common policies, monetary and exchange policies – not merely the sacrosanct policy of competition”.

And, while ‘Alternatives Economiques’ regularly published articles that were critical of Brussels, it also believed that the EMU needed time to bed down.

Duval claimed that Americans shouldn’t criticise the ‘work in progress’ that is the EMU because “it took 137 years after winning independence (and then a bloody civil war) for the Americans to create a central bank”.

And that along the way there have been important “changes that have already been made to the architecture of the eurozone following the 2010 crisis”, which critics like Stiglitz underestimate.

He claimed the “banking union has already been put in place”, despite lacking a “common deposit insurance”.

He also claimed that the “‘Six Pack’ of 2011” introduced new “rules to limit trade surpluses”, which will allow German excesses to be curbed.

And he extolled the virtues of the European Stability Mechanism as being almost a mutualisation of debts.

Finally, he concluded that “regardless of what Joseph Stiglitz is saying, the euro has attained its objectives” and points out that the “ECB is engaged today in an extremely expansive monetary policy, and its balance sheet now exceeds that of the U.S. Federal Reserve”.

All of which is quite astounding.

And you get an idea that Duval struggles to understand macroeconomics when you read his discussion of what would happen to a nation that dared to exit the dysfunctional EMU.”

11 Ingelesez: “Despite claiming to represent anti-neoliberal thinking, Duval’s arguments are core neoliberal scaremongering.

1. “That state would immediately see the interest rate at which it borrows leap upwards sharply”.

Why would that happen?

As a newly restored currency-issuer, the Italian government could just stop issuing debt if it desired.

2. “right away there arises the sticky question of the debts that have accumulated vis-à-vis the rest of the world”.

Apparently, given that the new currency would depreciate then the debt burden will rise.

But why would any of that happen?

It is not clear that the Italian currency would depreciate significantly, but if it did that carries no implications for debt that it chooses, under the principle of Lex Monetae to redenominate in terms of the new currency.

Then the risk is shifted to the debt-holders.

3. “In any case it would certainly be forced to suffer, and for many years, an austerity out of proportion with that imposed (foolishly) by the Troika.”

Why would that be the case?

Duval claims Greece new that would be the case and that is why it stayed in the EMU.

But this is clearly delusional. As the currency-issuer, the Italian government could use its fiscal capacity to stimulate domestic demand. No austerity would be required and given the state of the labour market desirable.

4. “As for the idea of a smooth exit from the euro that does not undermine the European construction – well, that smacks of the most fanciful science-fiction.”

Duval claims that an exiting nation would have to “regain their ‘competitiveness’ vis-à-vis their neighbours. That is, to steal a march on them by grabbing their neighbours’ share of the export market and encouraging their neighbours’ businesses to cross over their border”.

This would undermine European solidarity.

Seems like that is exactly what Germany has been doing since day 1 of the Eurozone.

5. Finally, and we leave the best (worst) for last, Duval claims that “an exit that will plunge the continent back into the horrors of its past”.

There is really no argument against that nonsense.

Duval’s original article was published in French in Alternatives économiques, which I remind you began life and took on its title, as a response to Margaret Thatcher’s TINA suppression strategy.

And so you would be interested in learning that Duval claims that “Europe has no alternative” but to stay with the euro.

A sort of Animal Farm transition, n’est-ce pas!

This is the way Groupthink becomes entrenched. And this was all written by a so-called progressive commentator. Which tells you had large a challenge it is to escape the neoliberal web that Europe has evolved into.

I remember I was a speaker at a Euroepan Commission event in Florence in 1996. At that event, I was one of a few economists who were highly critical of the Maastricht Treaty and the potential of the EMU.

The hostility at the meeting towards my views, though suppressed by the sort of artificial politeness that is common at these sorts of events, was profound.

I was told that I was not European and so couldn’t understand the imperative of establishing a common currency and the liberative elements that the euro would bring.

Hmmm.

12 Ingelesez: Duval’s final criticism of Joseph Stiglitz:

Can we really blame him? Any European who set out to write a book about what the Americans should do to limit inequality in the United States and bridge the growing gap between Republicans and Democrats, whites and blacks, or the states of the Bible Belt and those along the coasts, would surely be completely off the mark as well.

A repeating theme. Shut the f**k up because you are not European.

As if research and observation have no place. Groupthink.

This is the problem of the Left in Europe.

These views on what the euro represents and what would happen if a nation exited are so misguided and embedded with neoliberal myths that it is almost impossible to have a reasoned argument.

Here we have a group that proposes its initial existence as a bulwark against TINA morphing into a bulwark for TINA.”

13 Ingelesez: “.”At least there has been some shift in Joseph Stiglitz’s position on the Eurozon.

His latest article in Politico (cited above) indicates that he has moved more into the breakup camp as the folly of the European elites continues.

Joseph Stiglitz is saying that:

Italy is right to consider leaving the EU’s common currency area.

And asking:

What’s the best way to leave the euro?

That is progress in my estimation.

His analysis is correct:

The euro has been flawed since its conception. For countries like Italy, it took away two key adjustment mechanisms: control over interest rates and exchange rates. And instead of putting anything in their place, it introduced tight strictures on debts and deficits — further impediments to economic recovery.

And the conclusion that the “euro was supposed to usher greater prosperity” but “has done just the opposite” is undeniable in my view.

How the Europhiles can claim it has been a success is beyond me.

Yes, I can understand those who have a visceral attachment to the idea of European integration – a sort of ‘wouldn’t it be nice if we were all one in harmony’ type of vision. And some have the sense to admit the current experiment has been a disaster but hold out hope that long-term reforms will put it all right.

I think they are misguided and fail to understand the roadblocks that are in place that will prevent any reasonable reform happening within any reasonable time frame.

Waiting 10, 20 or whatever years to ‘get it right’ is not acceptable in my view. Each generation of citizens that enter adult life with the horrific youth unemployment rates is one generation too many that is being wasted by these ridiculous austerity policies.

But I cannot understand anyone who claims the euro has been a success and is on the right track.”

14 Ingelesez: “Joseph Stiglitz correctly identifies that in terms of reforms, the “problem is Germany’s reluctance to do it”.

That has always been the problem. The other nations should never have tried to coax Germany into a common currency.

It was bad enough when the post-Bretton Woods attempts at currency stability just morphed quickly into becoming a Mark-zone, given the lack of cooperation that the other central banks received from the inflation-obsessed Bundesbank.

Joseph Stiglitz is also correct that if the Southern European countries were able to regain flexibility in their currency parities (through exit or exit of the Northern euro nations) then “exports of Italy and other Southern European countries would increase. The major source of misalignment would be gone.”

The following graph shows movements in monthly exchange rates (available at the Norges Bank) from January 1960 to February 2002 (when the Member State currencies ceased and the euro became the only currency in circulation).

The rates are expressed as indexes (January 1960 = 100) and as parities against the US dollar. So a rising trend indicates that the specific currency is losing value against the US dollar and vice versa.

The graph allows us to understand very clearly why the EMU should never have been created in its current form.

After Bretton Woods collapsed in August 1971 and the US dollar floated, the attempts at maintaining stability among the European currencies proved difficult.

I documented the history of the currency arrangements post-Bretton Woods in my 2015 book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale (published May 2015).

The conclusion was that these economies were so disparate that trying to bind them together with fixed exchange rates or, indeed, the next step, a common currency would not deliver satisfactory outcomes.

And Germany’s behaviour post-February 2002, where they engineered a massive internal devaluation (Hartz) and aggressively pursued ever increasing current account surpluses, has only served to exacerbate these disparities.

That is why Italy is now on the brink and economists such as Joseph Stiglitz are now in the exit camp.”

15 Ingelesez: “The Bank of International Settlements publish monthly Real Effective Exchange Rate (REER) data. You can learn about them from the BIS publication – The new BIS effective exchange rate indices – which appeared in the BIS Quarterly Review, March 2006.

Real effective exchange rates provide a measure on international competitiveness and are based on information pertaining movements in relative prices and costs, expressed in a common currency. Economists started computing effective exchange rates after the Bretton Woods system collapsed in the early 1970s because that ended the “simple bilateral dollar rate” (Source).

The BIS ‘real effective exchange rate indices’ (REER) adjust nominal exchange rates with other data on domestic inflation and production costs.

If the REER rises (falls) then we conclude that the nation is less (more) internationally competitive.

The following graph shows the REER movements from January 1994 (first available BIS data) to February 2002 for France, Germany, Italy and the UK.

We saw in the previous graph that the nominal exchange parities diverged for Italy and Germany. This helps us understand the movements in the REERs.

Italy was able to maintain international competitive vis-a-vis Germany and France over the latter half of the 1990s and into the euro period because its nominal exchange rate was able to move even though there were currency arrangements in place (the EMS) to manage the amplitude of those movements relative to the other participating European currencies.”

16 Ingelesez: “Joseph Stiglitz is also correct in his assessment that:

Italy has the opportunity to make a different choice. In the absence of meaningful reforms, the benefits for Italy of leaving the euro are clear, straightforward and considerable.

There is no doubt about that and the continued denial by Europhile commentators is testament to their insecurity.

They know that if a nation was to exit and restore domestic demand and enjoy a boost in their international competitiveness (or maintain it without the destructive internal devaluation) then the blueprint is set – for the rest to follow.

Then the game would be up.

They wheel out productivity graphs like the following one (using OECD data) with the indexes of GDP per hour worked set at 100 in 1990.

Irrespective of the base year chosen, the data shows that hourly productivity in Italy slowed in the 1990s, well before the euro was introduced.

17 Ingelesez: “And the slowdown that Italy experienced in the 1990s was in no small part driven by explicit government choices. If one digs further into the data it becomes evident that Italian manufacturing continued to demonstrate on-going productivity growth through the 1990s and beyond, albeit slightly below the rates experienced by France and Germany.

But productivity in the construction sector, and more clearly, in the services sector drove the overall fall in productivity post 1990s.

Why might that have occurred?

The Italian government introduced two waves of significant labour market changes in 1997 (the Treu Package) and in 2003 (the Biagi Law), which were aimed at stimulating employment growth for low-paid workers.

These changes “relaxed the discipline for standard temporary contracts and introduced new forms of “atypical” non-permanent contracts (e.g., agency work) while maintaining existing rules on permanent contracts” (see The Recent Reform of the Labour Market
in Italy: A Review
(December 2017)).

The upshot was that:

employment grew strongly until the 2008 crisis … [but] … more than half of the new jobs were temporary …
The share of temporary employment in the total number of employees increased from less than 8% in 1998 to nearly 15% in 2015Q3.

These are exactly the sort of so-called ‘reforms’ that the organisations such as the IMF promote.

What these changes achieved was strong employment growth at the expense of increased duality in the labour market, which anyone with a brain predicted when we became aware that the Government was introducing them.

Yes, they reduced unemployment and provided employment opportunities for the least-skilled workers.

But the research paper I just cited concluded that:

While temporary contracts have a role to play in the economy, excessive labour market segmentation is found to be associated with low access to training and weak career progression, with negative implications for productivity and labour market volatility.

That is the Italian story.

Why don’t the Europhiles elaborate on that history when they take cheap shots with their productivity graphs?

It was the wrong way to stimulate employment growth. It would have been better to maintain employment standards and introduce a Job Guarantee to absorb low-paid workers that were struggling to find work elsewhere.

What the data tells us is that Italy is trapped in a mire of stagnation, which is placing its Society in peril.

The following graphs show real GDP growth performance and unemployment rates.

The Italian economy is around 6 per cent smaller than it was in the March-quarter 2008. It cannot get out of that mire with the current policies that the European Commission wants it to follow.

It has to stimulate domestic demand and that will require higher fiscal deficits for a prolonged period.

The bond markets will not allow that and the ECB will only keep spreads stable (and facilitate ongoing funding of the Italian government), if Italy bears down further on its current austerity bias.

That is the way the Eurozone works via the currency issuer breaking the Treaty (with its QE program) and then blackmailing Member State governments with threats of sending them broke if they do not toe the ideological line.

That alone is why Italy should exit.”

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