Saturday, August 16, 2014

Ambrose Evans-Pritchard Proposes the Lira for Italy. And a Drachma for Greece?

Ambrose Evans-Pritchard dropped a bit of a bombshell when he proposed in this article that "Italy must bring back to lira to end depression" ("Italy must look after itself. It can recover only if it breaks free from the EMU trap, retakes control of its sovereign policy instruments and redominates its debts into lira, with capital controls until the dust settles"). His supporting argumentation is, as always, powerful. What goes for Italy, does it also go for Greece?
This is AERs most important point: "I do not wish to revisit the stale debate over why Italy kept losing labour competitiveness against Germany for a decade and a half, except to say that it proves just how hard it is to bend Europe's deeply-rooted cultures to the demands of a currency experiment".

Sadly, exactly this point had been made almost 5 years before the launching of the Euro, at a time when the experiment could still have been avoided. Prof. Ralf Dahrendorf, later Lord Dahrendorf, one of Europe's great liberal thinkers of whom one would have expected total support for the planned common currency, said in an 1995 interview with Der Spiegel the following: "The common currency project drills the countries to German behavior, but not all countries want to behave like Germans do. For Italy, periodic devaluations are much more useful than a fixed exchange rate and for France, higher government expenditures are more meaningful than a rigid adherence to stability criteria (which are, above all, an advantage for Germany)".

That 'cultural' argument, to me, carries more weight than any technical argument which economists may come up with.

The key difference between Italy (and France) and Greece is that Italy (and France) has huge industrial potential: "We forget that Italy used to run a trade surplus with Germany in the pre-EMU days. The north Italian industries were viewed as formidable competitors, whenever the lira was weak. It is an incontrovertible fact that Italy’s 14-year disaster coincides with EMU membership. This does not prove causality. It suggests that EMU set off a very destructive dynamic for Italy's particular circumstances, and is strong evidence that EMU now prevents the country from breaking out of the trap. In a damning report, it was shown how Italy's productivity growth and competitiveness faltered each time it pegged its currency to Germany over the past 40 years. It roared back with each devaluation".

So Italy is clearly a case where existing potential is being damaged by the common currency. France probably, too. 

I am not sure that one can make that case for Greece as well. Greece never had any substantial industrial potential (and, in the case of Greece, I am thinking of middle-market manufacturing and not of big industry). If some form of industrial potential needs to be built up, Greece may have a better chance to accomplish that with the Euro than with a local currency. 

Some of my Greek friends argue that Greece will eventually have to return to the Drachma and the old way of doing things: cheap tourism, shipping, a fair measure of moving up in the economic value creation chain and, of course, money printing. Anything else, so they say, does not fit the Greek culture.

Maybe yes, maybe no. On the other hand, one has to consider that Greece, in the last years, has made an enormous investment, or rather sacrifice (austerity, reforms, etc.), into a cultural change; a better life with a common and hard currency. 

Off the bat, I would argue that attempting to change a culture with the instrument of a common currency is an experiment which I wouldn't bet my money on. But, then, I would have thought 4 years ago that Greeks would never be prepared to bear the cost associated with the 'drill to German behavior'. Today, I am surprised and stand corrected. Greeks are always good for surprises. Who knows? Perhaps Greece will, indeed, manage to eventually use the common currency for its benefit and not only for its suffering?


  1. Italy and France have huge industrial potential as already said, so AEP's perception is good, especially in relation to a chronic-peculiar stagnation of Italian economy.
    Italy's current account is around 2 bil € in May and foreign trade is positive around 14 bil in June.

    Current account, balance of payments, even budget execution from 2000-2010 were in much better condition compared to Greek performance.

    Debt however is too high but italian banks administrate a share of it.

    NPL increased

    but this create opportunities.

    Italy also is one of the largests holders of gold.

    Italian banks deal with problems however have good CAR, the leverage of top 5 is among 10-18 and CIR (as opposed to Deutche Bank you have mentioned) is among 48- 60%!

    A restructuring in Italy's debt lets say could be easiest than in case of Greece and without taking a notice?


    1. Well, I must admit surprise. I hadn't looked at Italian figures in a long time and the last time I looked I recalled deficits in trade and current accounts. Instead, I now see that their external numbers are booming. That doesn't match up with what AEP wrote in his article. I will better stick to Greece...


    Probably you would know the proverb, or you may use it in Austria:

    "If you not praise your house, this will fall and crush you"

    But what is happening with Austria?

    Some think to introduce taxes on inheritance and a "millionaires tax" on the super rich, others like former finance minister saying instead of cutting taxes to focus on cutting debt.

    And of course, Austrian to have orientation in Berlin not ( for God sake!) to Athens.