Like the portent of a typically scorching Italian summer, the first warnings came at the beginning of June.
But while the sweltering June temperatures that herald the start of the season would easily go unnoticed in Italy, proposals to give up the euro have made headlines all over the world, attracting the attention of economists and analysts alike.
What started as a suggestion by the Northern League, the maverick component of Italian prime minister Silvio Berlusconi’s ruling coalition, Casa della Libertá, ended up as the hot theme for summer 2005 in Italy and Europe. The heat is on.
At first the anti-euro suggestions appeared to be just another of the many short-lived political squabbles that are integral part of the Italian political system.
So when Berlusconi, the head of the right-wing coalition, reiterated that it was “impossible and inconvenient” for the country to exit the euro, the matter seemed to have been dismissed, hopefully to make room for other items on the political agenda, like the full implementation of the pension reform, to name one issue.
To many, Berlusconi’s remark seemed entirely logical. After all, Italy was one of the founding members of what is now the EU. In 1997 the country also put in place special measures to starve its deficit from about 7% to less than 3% in order to qualify as a member of the euro club.
The prime minister’s stance was endorsed by president Carlo Azeglio Ciampi, who in 1997 was a cabinet technocrat working on measures to help the republic to meet the Maastricht parameters. A statement from the presidency’s press office read: “It is not right to blame the EU for responsibilities of the single member states.
“The economic difficulties of the country are not due to the introduction of the single currency, but rather to the policies of the single governments.”
So the euro was absolved in June, but at the end of July Berlusconi performed a U-turn, saying at public meeting of his party, Forza Italia, that “RomanoProdi’s euro has screwed us all.”
The change of tune is due to the proximity of the general election expected to take place next spring. But the move could have serious consequences for the country’s credibility as a EU member.
The right coalition’s argument and electoral mantra is that the country’s slow growth, low competitiveness and high public debt have all stemmed from membership of the euro club, for which ex-prime minister Romano Prodi’s government had strived.
The euro has suddenly become an electoral battlefield between Berlusconi and his arch rival Romano Prodi, who also headed the European Commission from 1999 to 2004.
“The theory that all our woes come from the euro is not backed by the majority, but from a consistent minority,” explained Guido Blasco, senior analyst at the Milan-based office of Hewitt Associates.
“Before the euro, we were used to bailing our economy out by devaluing our currency. These people think this trick is for ever, but we have a public deficit of E1,500bn and it may be all right to redeem it at 4% (average Euro-zone interest rate), but if the figure went up it would choke the economy,” Blasco said.
“If we ever left the euro, Italy would tear itself away from Europe to navigate southwards, like a stranded boat heading for the Sahara desert.”
But according to Blasco, the switch back to the lira would not necessarily mean bad news for pension funds, as they tend to invest abroad “simply because the domestic market is not too big”.
“Ironically, the comeback of the lira could give pension funds better returns for government_gilts. We are not talking of 4% (interest rate) but possibly 12%, albeit in a more unstable environment”
“It would not really be a great problem for pension funds per se, it would be rather a problem for pensioners, who simply will have to stop eating, and it would be a tragedy for the Italian economy,” said Blasco.
It is not all bad news for the country though. Raj Gunaragna, an economist at the analysis company 4cast, said the third quarter will strike a more positive balance for Italy, with unemployment falling and higher consumer spending.
“Leaving the Euro-zone would favour Italy in the short run, but
it would be at a huge cost and it
would be a double-edged sword,” Gunaragna said.
The economist explained that by giving up the euro, the country could go back to devaluing its currency.
He said it would help give the country an edge on exports, but the problem of competitiveness - or the lack of it - as well as the issue of labour reforms, which are much more difficult to put in place, would still remain.
Italian exports to non-EU countries has grown in line with the EU average but exports within the EU have “grossly under-performed”, according to Gunaragna. More competitive countries do better in the export area, he said.
“I think in the long run it is best for Italy to improve its competitiveness and remain in the euro,” he said.
The prospect of Italy leaving the Euro-zone does not seem to alarm pensions and investment expert Ros Altmann.
“I would not be surprised if Italy found that it felt too trapped to stay,” said Altmann, who is a consultant to members of the Number 10 Policy Unit.
“Italy had to fudge its budget figures in order to qualify for the euro in the first place and has not done enough to reform its economy to match that of other euro members,” she said.
“The Italian retirement age is too low, the state pension is too high and the costs of all this are unsustainable in the longer term. Until Italian workers accept that something must change, the economy and the fiscal position will remain a problem,” the economist concluded.
Will Berlusconi use the euro as a stick to beat Prodi in the forthcoming electoral campaign, knowing that this card might endear his coalition to small business? And will Prodi choose to challenge his rival on the same ground?
Summer in Italy lasts until October. The heat the definitely on.