Italexit or Berlinexit?

The COVID-19 crisis has reignited the never fully settled debate over Italy's membership of the euro area. It is not only the long-standing anti-Europeans who complain that Europe has been entirely absent from our country's side as it faces the most serious health crisis it has ever suffered. The criticism is aimed less at Europe as such than at Germany and the other northern countries, which are blocking requests from Italy and other Mediterranean nations to issue eurobonds to provide financial support to the countries that have literally been forced to shut down their economies in an attempt to slow the spread of the virus. But what are eurobonds? In theory, they are bonds issued jointly by all European states. That, however, is easier said than done. When eurobonds are discussed, the technical details of their issuance are rarely spelled out. How, for example, would the principal and the interest be shared among the various European countries? And above all, what interest would these bonds pay their holders? Since they would also be guaranteed by Germany, the market would probably treat them as equivalent to German government bonds. A country like Italy would therefore be able to borrow at a significantly lower rate than it pays on its own government bonds. The northern European countries favour using the European Stability Mechanism, a kind of mini International Monetary Fund operating at European level, which can also issue bonds or open credit lines but would at the same time allow closer oversight of how recipient states use the funds. Italy's public debt, already high before the coronavirus crisis, will in fact probably grow exponentially as a result of it, making the future of our public finances rather uncertain.

Clearly the problem is not confined to Italy: every country will need fiscal measures, financed by higher public debt, to get back on its feet. Germany, for instance, which at the start of the crisis seemed the most reluctant to halt its economic activity to slow the spread of the virus, has stepped in with 500 billion, an enormous sum compared with the funds deployed by Italy, which was the first country to take draconian measures to slow the rate of infection, accepting a dramatic collapse of its economy as the price. In recent years, however, Germany has also managed to reduce its debt by keeping public spending in check. In Italy, by contrast, even the most ambitious reformers abandoned the goal of cutting spending years ago. It is therefore at least consistent that the Germans now have the ammunition to face the crisis with counter-cyclical measures, while the countries that did not save in these years now find themselves without resources; the irritation of the German public is also understandable: what is the point of being virtuous if the non-virtuous then receive the same treatment as you? In an imaginary debate, the Italian side might reply that, in terms of managing the public accounts, Italy has in recent years succeeded in running a primary surplus, and that it is the interest on the accumulated debt, the debt overhang, that is straining the country's finances. The economic question is thus complex and hard to settle, and both sides have valid arguments. Many, however, while understanding German concerns, criticise Germany's political strategy: its lack of flexibility at such a dramatic moment could potentially lead to Italy leaving the Union, a shock whose costs would exceed those of helping it with eurobonds or coronabonds. This view, though valid, is perhaps short-sighted in the literal sense of the word, since it clearly sees the problems close to us, namely growing resentment and lack of trust in the European Union in Italy, but not those further away, taking for granted that the German public and German politicians are willing to defend the current state of the monetary union at any cost. Yet it is a widespread view in northern Europe, and not one confined to the right, that Europe should split in two: a “two-speed Europe”, to put it in politically correct terms, with the more virtuous northern countries left to pursue ever closer integration and the spendthrift south left to its own devices. A prospect that many German savers may find more appealing than bearing the cost of coronabonds and potentially also having to mutualise Italian public debt every two or three years, given our limited appetite for reform. There is much fear of an anti-European backlash in southern Europe if eurobonds are not issued, but the equal or greater backlash their issuance could provoke in the north is completely ignored.

In conclusion, the question of membership of the monetary union is often viewed one way only, taking for granted that leaving the euro area is plausible only for countries in difficulty, such as Greece yesterday and Italy today, while Germany's membership of the Union is entirely unconditional. Deciding our next moves on the basis of this assumption could prove dangerous.