Why doesn’t Prodi tell the true story about the euro?
Giuseppe Liturri's analysis
There are two false and misleading arguments to speak ill of the Euro and, in fact, defend it. One is “we entered with the wrong exchange rate”, the other is “prices have gone up out of control, we have been ruined”.
We believed it was a twenty-year-old debate and instead on Monday we witnessed a delightful television curtain between Romano Prodi, the Prime Minister who physically led us into the single currency, and the Senator of the Brothers of Italy Ignazio La Russa. And we plunged back in time, talking about the obvious similar to that of the Sun rising in the east and the Earth that revolves around it. With the difference that La Russa is not an economist and some things might not handle them, while Prodi – who was the protagonist of that season – tried to rewrite his pro domo history. And, in order not to miss anything, he added that these are things that "everyone understood, except The Truth and these newspapers here".
We are inclined to attribute this attention to the fact that for some time now it has been possible to read on these columns – with an advance varying from three months to a week compared to the big media – analyzes and evaluations on our relations with the EU that dismantle the propaganda piece by piece. eurolyric. Maybe annoying the Professor.
The issues that Prodi wanted to clarify, and which we apparently have not understood, are two.
Was the entry exchange rate of 1936.27 Lire for one Euro penalizing for our country? Prodi correctly pointed out to La Russa that it was in Italy's interest to enter at a rate as devalued as possible, in order not to damage exports. And to explain it he referred to the famous negotiation of November 24, 1996. That day Carlo Azeglio Ciampi (Minister of the Treasury), Mario Draghi (Director General of the Treasury), Antonio Fazio and Pier Luigi Ciocca (Bank of Italy) negotiated the Marco exchange with the Germans / Lira for Italy's re-entry into the European Monetary System (EMS).
The negotiation ended at 990 Lire for one Mark and this change automatically determined, 5 years before the introduction of banknotes, first the Lira / ECU ratio and then Lira / Euro. It was the Lira / Marco exchange rate that determined the Lira / Euro exchange rate because the latter direct heir to its predecessor ECU, was a "basket" currency of all the Member States, each with its relative weight (not only British Pound and Danish krone). If that deal had closed at a higher level, the Lira / Euro exchange rate would have automatically been higher than 1936.27.
Prodi is right, he cannot be accused of having negotiated a too weak exchange rate. At least it should be the other way around. Or did someone in Italy want to have a Lira / Marco exchange rate of 800 (and therefore Lira / Euro well below 1936.27), destroying exports and suffering the invasion of German imports? But Prodi does not tell the whole story: that change to Lira / Marco at 990 at the end of 1996 was the consequence of the descent, and therefore of the revaluation of the Lira, from 1,250 reached in spring 1995, which had given wings to Italian exports. So entering the euro cost us a substantial revaluation, other than jumping for joy when the Germans offered us 990. We presented ourselves to that negotiation with the exchange that the Germans liked. At 1250 they would never have let us in because we would have made them a very strong competition.
The other (false) argument against the euro is rising prices. Prodi, to defend his creation, endorses La Russa's hypothesis of the de facto conversion of one thousand Lire into one Euro, with a consequent generalized increase in prices. This is the anecdotal but it is different from the data: since January 2002 (after 3 years of euro as bank money) Italian inflation actually increased, from levels just above 2% up to fluctuating between 2.5% and 3%. It remained on those from the second half of 2002 until all of 2003. A rate of growth in prices that was not scandalous. Suffice it to say that the target threshold still used by the ECB is 2%.
Prodi cannot fail to know the inflation data in those years. Similar trends were found up to 2002 also in France and Spain, albeit starting from different levels. After 2002, the problem was not that of internal price control, but that of the inflation differential between the various states. This is the fact that determines competitiveness when exchange rates are fixed. But strangely, Prodi forgets to tell the rest of the story: with the euro and therefore with the nominal exchange rates between the adhering countries fixed forever, after 2002 Germany had an easy game in containing its inflation and therefore gaining competitiveness, without risking a revaluation of the nominal exchange rate. German inflation plummeted from around 2% to 0.5% in a few months, while Italian inflation remained stable just above 2.5% (in France between 2% and 2.5%).
In those years, enormous imbalances were built up that we still pay today. This is the trap into which he led us, other than the increase in the price of newspapers.
Coincidentally, just in the same hours the governor of Bank of Italy Ignazio Visco recalled those imbalances stating that "a currency without a state can last up to a certain moment but then there is a need for a state and a budget union", recalling how currently the ECB is "the only federal central bank in a group of countries that does not have a federal structure".
They will end up claiming that they have always said certain things, we were unable to understand them.
(article published in the newspaper La Verità)
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/prodi-euro-la-russa/ on Sat, 27 Feb 2021 19:19:57 +0000.