>> GROUP: Shadow ECB Council / EZB-Schattenrat  Prof. Richard Werner

Prof. Richard Werner: How dangerous is the current political situation in Italy for the euro-area as a whole?

Defining the euro-area as a geographical area, and defining ‘danger’ as something that negatively affects the economy, it must be concluded that the evolving political situation in Italy should not be considered as dangerous for the euro-area. Comparing the risks of the current situation to the risks lying ahead when we were in the late 1990s and pondering the introduction of the euro, it is clear that the risks were far higher then, and they are far lower now. In fact, the gravest dangers for the euro-area as a whole were created by the very introduction of the euro. This was my assessment in the 1990s (see published letters to the editor of the Financial Times) and the events since the mid-2000s have confirmed my warnings.

The euro never made any economic sense for any member country. Its introduction created severe dangers and has, in fact, imposed extremely large economic and social costs on the population of the affected area (i.e. the euro-area).

The solution to this major policy mistake is to help countries such as Greece and Italy exit from the eurozone quickly, and, in order to facilitate this and show maximum solidarity with these countries, arrange for a simultaneous exit from the eurozone by all member countries.

The process is not difficult: it involves the announcement of the reintroduction of national currencies at the original 1999 exchange rates. Since cash in circulation is tiny, the process consists merely of a redenomination of digital ledgers, mostly at banks and central banks. This is why it would not be a problem if no national currencies had been printed in paper notes at the time of the conversion back to national currencies. In fact, such a conversion back to national currencies offers a unique opportunity to enhance financial inclusion and increase the use of digital currency, as opposed to paper currency.

Should the reader wonder what would happen to the national debts issued in the euro, again this follows the reverse process of 1999 and the following years, as such national debt will at the time of the announcement of immediate conversion to the national currencies also be redenominated, which in some countries can be done by passing a law to this effect, if needed.

The TARGET2 balances will become external debt, as they have in fact always been. Market forces will be allowed to play a more significant role once again also in the euro area, as bond prices and national currencies will once again be priced by traders and investors according to their assessment of risks and strengths.

This will immediately take the economic pressure away from Italy, Greece and other countries, as the subsequent weakening of their currencies and de fact depreciation of their debts means that domestic growth would be helped by ending the stagnation of their export sectors, while foreign investment is likely to increase dramatically. Most of all, in terms of the impact on economic growth, national central banks would once again be able to operate monetary policy suitable for each country, allowing the creation of credit by domestic banking systems for productive purposes, under the supervision of the national central bank, thus generating high growth without inflation and with significantly boosted employment. As tax revenues rise with the ensuing economic growth, deficit-to-GDP and debt-to-GDP ratios drop sharply and bond markets quickly recover. If finance ministries then want to further boost domestic growth, they can support the domestic bond market further by stopping the issuance of government bonds and instead borrow from domestic banks via non-traded loan contracts, thus also severing the prior vicious link between the stability of banking systems and sovereign bond markets.

Considering the above promising scenario and the actually realised disasters of the eurozone since introduction of the euro, it appears absurd for anyone to argue that any country should cling to the foreign currency called ‘euro’.

In conclusion, the current situation in Italy is not dangerous, but a ray of hope that economic reality will once again be recognised in the eurozone and less damaging policies will be chosen by European policy makers than has been the case for the past two decades.

What will happen to the ECB and its bond holdings? We should not worry about that. This international organisation is above the law, unaccountable to any democratic assembly and its files and documents, let alone staff, cannot be inspected by any public prosecutor. In effect, they can do what they want, and the abolition of the euro will put their immense and unprecedented powers to the test. Should the ECB decide to dissolve itself, we know that there are some honest and well-meaning public servants working at this place. It will be sad that the ECB Shadow Council would subsequently have to be dissolved – but this might be a price worth paying for the sake of a prosperous future in Europe.

How will it affect the normalisation of monetary policy?

Based on the above analysis, it can only be considered favourable for the prospect of normalising monetary policy.
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