Under the euro, Italy hasn’t been able to grow for nearly two decades
There have been some amazing Italian inventions over the centuries. The newspaper. The pistol. The radio. The stock exchange. The motorway. And who could overlook those staples of modern life, jeans (originally from the French word for Genoa: genes) or the pizzeria.
Few other countries have contributed quite as much to creating the world we live in.
Right now, Italy could be on the brink of another major innovation. A parallel currency to run alongside the euro EURUSD, -0.0847% . It already had the backing of the former Prime Minister Silvio Berlusconi, and the parties supporting it are steadily gaining ground in the polls.
Could it work? The mainstream economic establishment will no doubt heap scorn on the idea. And yet, in reality, a parallel currency could provide an elegant exit from the euro, maintaining some of the advantages of the single currency, while freeing the country from endless recession. If it ever gets off the ground, Italy could quickly become one of the most attractive economies in the world.
It is hard to find any words to describe Italy’s experiment with merging its currency with Germany, France and the rest of the eurozone other than “dismal failure.” Since it adopted the euro, Italy’s average annual growth rate has been zero, according to calculations by the Bruegel Institute. You read that correctly. Absolutely nothing, over almost two decades.
By comparison, Spain has managed 1.08%, France 0.84% and Germany 1.25%.
Italy’s unemployment rate is a crippling 11%, the highest of Europe’s three biggest economies, and youth unemployment is a scary 35%. The national debt has climbed to a giddy 133% of gross domestic product, not because the government is especially extravagant, but because that’s what happens in a zero-growth economy.
Its banking system is close to collapse, and poverty rates are soaring. It would be hard to find a more damning record.
Sure, Italy’s economy is looking slightly better this year. Growth has ticked up towards 1% this year, and the stock market has jumped on the prospect. But a single percentage point after years of recession, and with the help of more than €2 trillion of printed money from the European Central Bank, is hardly anything to celebrate. The long term outlook remains grim.
In the background, Italy is starting to have a fascinating debate, not about exiting the euro, but about introducing a parallel currency alongside it.
Its main proponent is former Prime Minister Silvio Berlusconi, who, despite almost as many setbacks as Donald Trump, keeps bouncing back. In an interview with Libero Quotidiano, he argued for a parallel currency to run alongside the euro, which, in his view, would be entirely consistent with the existing EU and eurozone treaties. Companies and consumers, and of course the government, could then choose which currency they wanted to do business in.
As Berlusconi points out, it is not very far from the Lega Nord’s idea of a mini currency within a currency, which would then be used to pay government bills, welfare checks, and so on. Put Berlusconi’s center-right party and the Lega Nord together, and, according to the polls, they account for 30% of the vote. With the 5-Star Movement also hostile to the euro, it is far from impossible that Italy could try out a new kind of currency in the next few years.
Italy is not the first country to toy with the idea. Former Greek Finance Minister Yanis Varoufakis floated the idea for his country to run a separate currency alongside the euro back in 2015.
But could it actually work in practice? Most economists would probably argue that it couldn’t. No one would want to accept the new notes and coins. There would be no one to trade it, and its value would sink like a stone, making it even less attractive. There would be no central bank to manage it, and banks might not even be willing to accept deposits in the new unit. It could well become an irrelevance very quickly.
Those are all valid objections. And yet is far from a ridiculous idea. If it were backed by the government, it would have immediate presence and credibility —since the Italian state accounts for about 40% of GDP, close on half the economy would be operating on the new currency unit on Day One.
Assuming it devalued sharply against the euro, and assuming that most wages were paid in the new unit, there would be an immediate competitive devaluation against the rest of the eurozone. Prices would probably be set in both currencies, as they are in border regions, creating a round of inflation in the new currency. But very quickly that might settle down. The devaluation would restore competitiveness, and get the economy growing again.
Big companies might still use the euro internally, and so might the financial markets. But it might well gradually fade out of everyday Italian life.
Italy does not have to be a dog of an economy. From 1961 to 1980, its economy grew at an average rate of 4.16%, slightly behind Spain and significantly faster than France or Germany. The world likes Italian stuff — not just pasta and ice cream (although those are pretty good) but in design, technology, media and the arts, it has often been a world leader.
In reality, it has been held back for the last 17 years by a decision to switch to a German-dominated currency for which it was not prepared and to which it has never successfully adapted. Once that decision was made, it was hard to find a reverse gear. Hard but not impossible.
A parallel currency would be an ingenious escape route. It may or may not happen — and you certainly wouldn’t bet a lot of parallel lira on it happening any time soon. But if it did, Italy’s pent-up dynamism could be unleashed very quickly — and at the first sign of the currency being actually launched, smart investors should be buying as quickly as they can.