EKIP– Expert Club for Economics and Politics A Different Opinion
EKIP: Dear readers, we present to your attention an extremely valuable analysis of the "Theory of the Optimal Currency Area" and Italy's experience in introducing the euro. There are many useful things that can be learned from the experience of other countries in joining the eurozone, from which Bulgaria should learn a lesson. On this page we have selected a specific excerpt regarding the price shock that Italy experiences after adopting the euro, you can read the full analysis at the link below.
The Bulgarian debate on joining the Euro against the backdrop of the Italian experience,
Rome, May 1st 2021
Nikolay Bogatzky, University of Rome "La Sapienza", Department of Economics and Law
Rome, May 1, 2021
Nikolay Bogatsky
While the Bulgarian debate on the introduction of the euro is rather in its infancy, in Italy almost two decades of ideological battles and heated speculation on this issue have already passed. Instead of a constructive discussion, an ideological and propaganda clash was preferred. The topic is extremely thorny, especially because the socio-economic ruin, let's say for now, "coincided" de facto with the introduction of the euro in Italy. Proof of this are the very recent words of "Mr. Euro" himself - Mario Draghi, who is currently at the head of a hybrid government of the national agreement, as the last resort for administering the dramatic crisis that occurred simultaneously with the pandemic.
"A real social and economic catastrophe"
In the Introduction to the very recent National Recovery and Resilience Plan, approved by the Council of Ministers on 29 April 2021, Draghi writes: “Between 1999 and 2019, Italy’s Gross Domestic Product (GDP) grew by an overall 7.9%. Over the same period in Germany, France and Spain, the increase was 30.2%, 32.4% and 43.6% respectively. Between 2005 and 2019, the number of people below the poverty line increased from 3.3% to 7.7% of the population, before increasing further in 2020 to 9.4%. Women and young people are particularly affected. Italy is the country in the European Union with the highest percentage of young people aged 15 to 29 who are not in education , employment or training ( NEET ). The female participation rate in the labour market is only 53.8%, far from the European average of 67.3%. These problems are even more pronounced in southern Italy, where the process of convergence with the richer regions of the country is stalled.” In practice – a real economic and social catastrophe. The biggest problem is that the decades mentioned by Draghi coincide precisely with those of the euro and the imposition of the overwhelming parameters of Maastricht.
The radicalized and opposing positions in Italian society regarding the euro are mainly focused on two fronts. According to the official version, the country could not break away from the European project for a number of reasons: the cultural identity and belonging historically linked to the European project; the need for stability and growth, which would be automatically imposed by the "miraculous structure" of the single currency; the need for modernization and increased competitiveness of Italian companies, etc. As Mario Draghi himself has just stated - nothing of the sort has been noticed, on the contrary - the country is increasingly falling into a dramatic recession, teetering from crisis to crisis, sometimes even with the ominous specter of bankruptcy.
The official explanation claims that the fault for the collapse lies not with the euro but with the specific characteristics of the country, or more precisely: the Italian economy joined the European project chronically ill, deteriorating further over the years due to its inability to implement the necessary reforms and virtuous policies, ultimately proving itself “ unfit to compete.” The final element of the official narrative is that for Italy there is no way out of the single currency anyway, especially now, as the consequences will be even more tragic.
On the other side are the opposing positions, which focus on three main points: the “original sin” of Italy’s entry into the euro – poorly designed and disastrous, subsequently proving to be a real trap for the country; therefore – the euro itself is the real culprit for the overall social impoverishment; and finally – the vital need for an immediate exit from the common currency. In truth, this last line of opposition, which demanded in a hysterical tone Italy’s immediate exit from the euro, has in the meantime lost strength due to the dire situation provoked by the pandemic and the possibility of a last “breath of fresh air” thanks to the huge loans (a total of 221.1 billion euros) that Italy, skillfully navigated by Mario Draghi, will have at its disposal until 2026.
In any case, speaking out against the euro remains everyone's favorite sport in Italy. Interestingly, however, when this is done outside of an informal context, opponents of the single European currency are branded as nationalists, retrograde, "counter-current", populists, etc. Practically, in full harmony with today's doctrine of political correctness, publicly opposing the euro means confrontation with the official narrative and the mainstream, and therefore - automatic exclusion from the ranks of "responsible citizens".
Prices are doubling
However, there are quite convincing studies on the subject. According to some of these studies, even the National Italian Statistical Institute (Istat) carries out a kind of cover-up, trying to confuse ideas, by converting all data from 1861 onwards into euros. Thus, while according to the "Milk Yearbook" the price of 1 liter of milk in 2000 was 1,754 lire, according to Istat it would have been 1.35 euros (i.e. 2,613.96 lire), or over 49% more; while according to the "Meat Sector" the price of beef per kilogram in 1999 was 15,032 lire, according to Istat it would have been 13.92 euros (i.e. 26,952.88 lire), or over 79.39% more.
And this is just the beginning, because any Italian citizen will confirm that with the introduction of the euro, the same things started to cost more or less the same amount as a figure, but with the differences of the comma moved three places to the left, and the different name of the currency (Argondizzo 2011). The lira/euro exchange rate was officially set at 1,936.27 lira for 1 euro. From 1 January to 31 March 2002, there was a common circulation of lira and euro, with prices being expressed in both currencies. Even in this short period, a gradual and inexorable correction of the internal exchange rate was observed. This process continued in the months after the final exit of the lira from the scene. The internal exchange rate gradually changed, gradually bringing it to 1,000 lira for 1 euro, "reassurance" the consumer by keeping its numerical sequence unchanged.
So, if the new prices in euros, by applying the official exchange rate, are expressed in their equivalent in pounds, the result is a sharp increase of 93.63%. This is in practice the real internal inflation rate in 2002, which must be added to the official rates measured since 2002. Thus, one of the main consequences is: an unprecedented and unjust transfer of wealth from fixed income earners (the only case for which the official exchange rate is valid, apart from stamp duties and services administered directly by the state) to all other types of employment, professions, business, trade, etc.
Entrepreneurs, traders, intermediaries and freelance professionals benefit from the doubling of final prices that is taking place in the Italian market. All these categories benefit additionally because they pay their employees not salaries obtained from the real (1.000/1), but salaries at the official exchange rate (1.936.27/1). Thus, those receiving a fixed income (public and private employees, and pensioners) remain stranded, despite the general doubling of prices, goods and services, losing half of the purchasing power of their income.
Businesses benefit, salaried workers lose
The rest of the Italian Euro-history is like a textbook on basic economics. The loss of half the purchasing power of a significant part of society (the majority of taxpayers) has dramatic consequences on the market's ability to absorb goods produced and services offered. The significant increase in prices causes a contraction in aggregate domestic demand ( aggregate demand or domestic final demand ) for goods and services. Given the historical tendency of Italian entrepreneurs to evade taxes, the state, already sufficiently torn apart by the waste and inefficiency of its mammoth administrative machinery, is unable to collect enough taxes to restore equilibrium in the internal market.
Subsequently, the negative effects, following the logic of the interdependence between the factors of the internal market, also affect the categories that initially benefit from the new economic situation. In this sense, it can be safely said that the introduction of the euro in Italy causes a significant arrest in the growth of the entire national economic system. The question is very curious: Who ultimately benefits from the introduction of the common European currency? Between 1996 and 2016 in Italy: 0.1% of the population doubled their personal assets, increasing them from 7.6 to 15.8 million euros. The five thousand at the top of the pyramid even tripled their resources (Ricci M. 2021).
It is also extremely interesting what is happening in the northern region of the common currency. According to the President of the Dutch Central Bank, Klaas Nott: "in the Netherlands, one of the biggest beneficiaries of the entire European market and the euro, the bonuses go more to entrepreneurs and capital owners, while workers are left behind. If the euro is seen as beneficial to entrepreneurs and not to workers, then political support for the project is at risk, since workers are the majority of voters."
Ultimately, at the level of the monetary union, again according to Knott: “countries with stronger economies, such as the Netherlands, gain more than countries with weaker economies” – as well as – “the lack of an exchange rate between eurozone countries is beneficial for stronger economies, while it is a relative burden for weaker economies” (Knott K. 2020). It is necessary to emphasize the public nature of the recent statements (supported by tables and diagrams) of the President of one of the European central banks, member of the Governing Council of the ECB – Klaas Knott ( lectio magistralis before Hendrik Jan Schoo, 1 September 2020, Amsterdam).
This text is just an excerpt, you can read the full article here.
