European leaders gather for yet another summit meet on December 8-9. This time around, they are even talking of treaty changes to give the unelected EU representatives in Brussels more control and power in order to keep the sovereign budgets of their member countries in line with the agreed fiscal norms. The solution that would come out, in whatever shape or form, would have two ingredients; the member nations in lieu of parting ways with a some of their sovereignty on financial issues would have their debt yields supported by a Central European or SPV structure like EFSF, and the ECB may agree to monetise part of their debt.

Both solutions can only work for a short while, but will create more problems in the long run as they fail to address the issue of reducing the excessive debt burden of these countries. And more importantly, both these solutions aim to keep the existing common currency set-up intact. In fact, this common currency has been the single biggest reason why some of the leading Euro nations of the 90s are staring at bankruptcy — the ideal case in point being Italy.

ITALY'S RICHES

Italy is among the richest countries in the world, a member of G7; it is among the top 10 largest economies; the population in northern parts of Italy is among the wealthiest by ‘per capita'; it is home to some of the top manufacturing brands and has a gold reserve which is second only to Germany in the Euro region (valued at around $400 billion). However, with each passing day, the Italian economy is floundering and being stripped of its democratic virtues — a people burdened with taxes; a government saddled with debt; and a nation staring at a bleak future despite the resources at its disposal. Why is it so? The graph above maps the industrial production of Germany and Italy since 1993. Notice how similar was the growth of output of these two countries used to move before the introduction of the Euro in 1999. Since then, this gap has been widening, and today, with industrial production of Italy sagging and that of Germany rising, this gap has widened to historic levels!

COMMON CURRENCY

The ills of this Italian economic catastrophe lie in none other than this common currency ‘The Euro', which was destined to create disparity instead of parity among nations. A currency may be a store of value for an individual, but for a society at large, it is nothing but a way to transfer wealth, and so an increase or decrease in the currency supply doesn't actually change the overall wealth of the society; it simply moves it from one person to the other.

Remember, a currency is nothing but a short-term government liability, and so, a currency note printed by the Central Bank and given to banks increases the assets of the banks, but at the same time increases the liabilities of the government by an equal amount, so net impact on global wealth is “zero”.

However, this increase in government liability has to be serviced by ordinary citizens; they end up doing this by either putting in more hours than usual at work for the same pay, or giving away more from their existing share of their income to the government in the form of taxes.

Central banks already have monopoly over money creation, and thus can easily transfer wealth these days by creating more money (to the benefit of capital owners and debtors over labours and savers) or by reducing its supply (to the benefit of labours and savers).

By giving away the power to print money, this transfer of wealth is now happening not just between individuals, but also between countries in Europe. The Euro, on a consolidated basis, is a weaker currency for Germany, and a much stronger currency for Italy. In other words, there are too few Euros for Italy, and too many for Germany.

UNFAIR ADVANTAGE

So, with such a strong currency, there is little incentive for the capitalists in Italy to set up industries, thus reducing the country's productivity and industrial growth (as seen in the graph). Consequently, the government ends up picking up the shortfall (more than 50 per cent is government contribution to Italian GDP) by running an exorbitant debt that it cannot repay.

Such a condition is advantageous for a country like Germany; this is not to say that Germany and German workers are not good at their work, but this provides an even extra edge as with reduced competition from Italian industries, it ends up selling a lot of its products ( see graph ). Had Italy been able to use its Lira, it would certainly have devalued its currency by printing more money and thereby transferring some of the wealth from its labour to its capital holders, thus unleashing the country's entrepreneurial spirit, and giving an incentive for more people to start industries.

The fiat monopolised currency system and a common currency area is a flawed idea. By giving away their right to the printing presses, not only have the Italians and other European countries bartered away their economic fates to foreign masters, but have also possibly given away their democratic ethos. It is unfair for the common Italian citizens to pay for the folly of the bankers; they are also paying for the misjudgements and hubris of their politicians and economic elites.

So, instead of parting ways with its fiscal sovereignty and democratic ethos in the upcoming summit, it's time for Italy to seriously consider an exit out of this common currency experiment, and in the process, pave the path for others to follow.

(The author is an independent financial consultant at Random Chalice Investment Research, Delhi.)

Related Topics