Don’t Blame The Euro

Who’s he kidding? Maroni’s nostalgia for the lira is little more than a transparent-- and irresponsible-- election ploy by Italy’s Northern League, an attempt to divert blame for the country’s present economic troubles onto Romano Prodi, former EU Commission president and center left candidate in the forthcoming general elections. A return to the lira would be “economic suicide” for Italy according to ECB chief economist Otmar Issing.

The euro has made Italian government bonds as good as German government bonds, because the ECB is willing to accept both on an equal basis as collateral for ECB loans. This has dramatically reduced the cost of borrowing for the Italian government. Has the Italian minister thought for a minute how his government would pay for all its public spending on welfare, and other items, if Italy’s interest rates no longer were subsidized by the ECB?

Perhaps Maroni wants to go back to the lira so that Italy can de-value it. This suggests an important advantage of the euro for Germany, where misplaced nostalgia for the deutsche mark -- no doubt aided by the steady invective against the common currency by government officials -- is growing. The euro stops countries like France and Italy from playing their old protectionist game of devaluing their currencies at German expense.

Because of this, the competitive advantages Germany recently gained from its economic reforms are being protected by the euro from offsetting currency devaluations inside the euro-zone. This is good news. Improved competitiveness facilitated by the euro bodes well for Germany’s medium term economic prospects.