If the exit from the euro became inevitable

di Emiliano Brancaccio


5' di lettura

Staying in or leaving the euro has been a frequent (and often poorly-discussed) topic in recent years. From the free-flowing opinions of armchair commentators to principled petitions by colleagues who prefer a lazy sort of partisanship over the hard work of popularization of scientific studies. Readers who want to inform themselves have had to choose between unfocused outlines that depict potential catastrophes or paradises, most of which lack references.
Therefore, Luigi Zingales has done well in promoting a new discussion by encouraging the participating scholars to follow a few simple rules for research, including good practices like distinguishing between personal impressions and theories that are supported by academic publications, institutional papers, and the consensus among experts.
Zingales is urging us to evaluate (above all) the costs and benefits of a potential decision by Italy to leave the euro. In order to carry out this calculation, it will be helpful to avoid the regrettable habit that was popular among academics a few years ago, which led them to examine the economy as if it was an elusive, singular entity that represented the entire population.
There's no need to disturb the ghost of Karl Marx in order to remember that, in reality, the system is composed of several, very different, social groups: therefore, it's necessary to specify which of these elements we're referring to each time we refer to them in our analyses.
To cite one of many examples, let's consider the rather widespread idea that a return to a national currency would easily give way to devaluation, and would thus serve as fuel for inflation. By identifying the different social groups involved, this theory persuades us to believe that leaving the single currency would support the entrepreneurs who make prices, while it would have negative repercussions on the earners of relatively-fixed incomes: orphans and widows (as they used to say) and especially the wage-earning workers.
On an institutional and political level, this conjecture has many admirers. The idea that abandoning the euro would give way to “big inflation” was authoritatively promoted by Mario Draghi at the beginning of his term at the ECB, and the correlated prediction that “the poor” will consequentially bear the brunt has been suggested by many-including, recently, Italy's Economy Minister Pier Carlo Padoan.
These viewpoints have also been supported in scientific
publications: from the young Krugman to Eichengreen and others, to Blanchard, Giavazzi, and Amighini, who espoused it in their renowned textbook.
Nevertheless, the empirical analyses have produced slightly different results [1]. Over the last thirty years, examples of abandoning rigidly-exchanged monetary regimes (and their subsequent
devaluations) have, on average, created a significant and long-lasting impact on inflation in less-developed countries-but this inflation has been modest and only temporary in relatively-advanced countries, including Italy.
In such countries, there have been negative repercussions on salaries and distributive transfers in favor of profits which, however, don't seem too far off from the decaying purchasing power and earned income that were seen at the beginning of the single currency's crisis, during the period of structural reforms and deflationary policies.
In short, the theory that leaving a monetary regime would cause “big inflation” is only partially supported by history, and the idea that the “poor” would be hit the hardest doesn't seem to account for the fact that these sufferings aren't dissimilar to those caused by the deflationary policies brought on by a rigidly-exchanged monetary regime.
Therefore, the decision to leave the monetary regime and depreciate seems to only partially influence the trends in profit distribution between capital and labor. The impact on capital's internal distribution seems to be more significant, between companies that are capable of making a profit even with a deflationary regime and the companies who would be crippled by it, and would need a monetary boost to get running again.
Some might object that the euro is a whole different situation in comparison with past monetary regimes, and that the results would be different this time around. This criticism is epistemologically bold:
if we economists refuse to even glance at historical empirical evidence, how can we look into the possible future scenarios? We wouldn't be able to do much, I'm afraid.
I cited just one of many examples in which investigating the costs and benefits of staying or leaving the euro can show results that partially differ from the commonly-held opinion.
Nevertheless, I must add that this kind of analysis might not be
decisive. In fact, there's a concrete possibility that we must
consider in our discussions: beyond the static calculations of advantages and disadvantages, at a certain point the interplay of the events could inexorably lead us to abandon the single currency.
The debate generally tends to consider such outcomes in relation to the results of a political victory for the so-called “anti-establishment” movements. But the issue isn't just related to electoral dynamics.
I believe that an additional problem is related to the fragility of the European mechanisms that have been established in recent years to manage the build-up of imbalances in credit/debt relationships, and guarantee the solvency of financial institutions. There are many hints that the European Union is ill-equipped to tackle potential banking crises, and the studies generally agree that if new crises were to spring up, they could fuel such a massive amount of capital flight that abandoning rigidly-exchanged monetary regimes/unions would become inevitable.
In short, a country in the Eu might find itself forced to re-establish national control over its currency due to the banking sector's severe and urgent recapitalization and stabilization needs.
Ultimately, this theory was promoted by the Imf in 2012, and it was re-proposed in the “Economists' Warning” that was published in the Financial Times in 2013 [2].
If this scenario is deemed plausible, the face-off between the “in”
and “out” factions would become a little less solid: even the sides that are in favor of sticking with the euro would be forced to adopt some sort of “Plan B”.
What should this “plan” entail? Ultimately, the goal is to resolve the old problem that was outlined by Padoa Schioppa and others:
between the complete freedom of movement for goods and capital, fixed exchange rates, and an autonomous national monetary policy, only two of the three options are compatible.
If the solution of delegating the monetary policy to a supranational organization (like the Ecb) fails, some would claim that it would be enough to abandon the preference for fixed exchange rate regimes and entrust the market and speculators with the monetary fluctuations.
As I and many others believe, this route would bring about new problems without resolving the old ones. It would be much better to pick up on some of the IMF's recent cues and begin thinking about restoring the measures regarding controls of the international circulation of capital.
[1] Analysis and empirical evidence contained in Brancaccio, E., Garbellini, N. (2015). “Currency regime crises, real wages, functional income distribution and production”. European Journal of Economics and Economic Policies: Intervention. Vol. 12, 3.
[2] AA.VV. (2013). “The Economists' Warning: European governments repeat miskates of the Treaty of Versailles”, Financial Times, September 23.

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