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Wanted: a friendly EU break-up

Oliver Marc Hartwich | Business Spectator | 27 September 2011

The core problem of Europe is not that its banks are fragile, its governments heavily indebted and its economy stagnant. The real problem is that Europe’s political leaders are still drawing the wrong conclusions from Europe’s many crises.

If the result of Europe’s bungled attempts of economic and political integration is a continent-wide disaster zone, the cure of this disease cannot be more integration, even if Philip Stephens thinks so (Wanted: one plan to save Europe, September 23). The challenge for Europe’s political leaders is not to make further integration work. It is to ensure that Europe’s coming disintegration happens in a peaceful manner and preserves the good elements of the European Union. This task will be difficult enough.

In many ways, the European Union ranks as one of the greatest achievements in European history. Throughout its history, Europe had been shaped by fierce and often brutal antagonisms between tribes and nations. National animosities were bequeathed from one generation to the next. The French and the Germans seriously talked of each other as ‘hereditary enemies’.

The European Union and its predecessors played an important role in burying such national rivalries by facilitating trade and exchange between former arch enemies. Instead of soldiers crossing borders, it was goods, services, capital and civilians.

The millions of ordinary Europeans spending their vacations in other European countries or studying at foreign universities were a greater source of peace than a thousand solemn summits of heads of government. Facilitated by the European treaties, this sort of European integration at the grassroots level was well established by the early 1990s, although it still had to be extended to Eastern Europe.

The introduction of the common currency was meant to be the culmination of European integration. It was not deemed enough that German tourists could freely travel to the Adriatic beaches of Italy but there they should also be able to pay for their cappuccini in their own currency. Just as if they had never left Düsseldorf.

What was overlooked at the time was the fact that part of the joy of an Italian vacation was paying for your cappuccino and your cornetto crema with a stash of autumn-coloured, worn out lira notes. More crucially though, there is an enormous difference between a continent freely trading with each other and a continent operating under the same economic and political regime. Look at what monetary union has done to Italy, for example.

Italy was a remarkable country in the post-war period. Politically it was chaotic with new governments being formed almost on a yearly basis, though usually led by the Democrazia Cristiana party. Economically it surely could have worked better – but it always worked somehow. As they say in Italy: Val più la pratica della grammatica. Practice is worth more than grammar.

Part of the Italians' ability to work their way out of trouble was the flexibility that their currency offered them. In 1955, the Italian exchange rate to the German mark was DM6.70 to ITL1,000. In 1975, it had fallen to DM3.77 and by 1995 it reached a record low of DM0.88. Or, to put it differently, in the four decades prior to the introduction of the euro the Italian lira had lost about 80 per cent of its value against the German mark. This kept Italy an attractive destination for German tourists but it also helped the Italian economy remain competitive, despite its numerous domestic problems.

When the euro was introduced, it effectively told Italians that they suddenly had to become German. Part of that ‘Germanification’ was pleasant because it meant lower interest rates almost overnight. But the longer monetary union lasts, the more clearly can you see that Italians have remained Italians after all.

Between 2005 and 2011, labour productivity in Italy has barely moved at all. It is now 0.8 per cent higher than it was six years ago. Italy’s real GDP is lower than it was in 2005. Even Spain and Ireland have done better over the same period.

There is, of course, no shortage of structural explanations for Italy’s economic malaise, including high taxes, low foreign direct investment, stifling labour market regulations and poor average education achievements. However, all of these problems had been with Italy for decades prior to the euro.

Italy’s membership of the euro had initially delivered interest rates that were too low and did not reflect its real economic problems. And now, in its economic crisis, euro membership is preventing Italy from its usual economic cure of devaluing its currency.

How would a country like Italy ever be served by further integration? How likely is it that Italians could be turned into thrifty and highly productive Northern Europeans by a political diktat?

The opposite seems much more likely. Further integration would compound Italy’s problems. Italy would not only continue to operate within the straitjacket of monetary union, but it would also have to play by economic rules that never reflected Italy’s long-established business and political culture.

For these reasons, and not least from an Italian point of view, it would be desirable to go back to where Italy was before the introduction of the euro: to be part of a free-trading Europe but to also have the freedom to find its own way.

Further integration is the last thing Europe needs. On the contrary, the zone now needs the courage to admit the mistake of pursuing a blind integration approach which has proven unworkable. But this does not mean going back to the nationalisms of times long past.

Europe’s leaders have to realise that the level of integration that was achieved by the 1990s was the maximum for which Europe was ready. And in contrast to monetary union and bailout packages, the European free trade regime of the 1990s was an almost costless win-win situation for all countries involved. The only sacrifice required was to occasionally exchange some money so you could buy your Roman cappuccino in Italian lire. But that’s a small price to pay to keep Europe peaceful.

The question is, will Europe’s politicians, having muffed European integration, now also bungle Europe’s coming disintegration?

Dr Oliver Marc Hartwich is a Research Fellow at the Centre for Independent Studies.