International Spectator

The International Spectator

Volume XXXIII No. 2 (April-June 1998)


The Euro and the Italian Economy *
By Marcello de Cecco


In spite of the continual complaints of the Bundesbank, which absolutely refuses to renounce its role as the European Cassandra (and has even transmitted it to the European Monetary Institution in the hope that the latter will pass it on to the European Central Bank), Italy has been accepted among the first group to enter into the European Monetary Union (EMU) next January. Books have been written about the adequacy or inadequacy of Italy’s plans to bring its public debt down to more easily sustainable values, therefore there is no need for further comment on this albeit very important point. It may be helpful, however, to make some common sense considerations about the consequences Italy’s participation in EMU may have on the structure of the country’s economy.

In this connection, it is interesting to note that the process of European integration has been going on since the end of the fifties. It was an English historian, Alan Milward, who demonstrated in his many excellent works that, above and beyond Europeanist rhetoric, the process of European integration has been a very complex experiment from the beginning aimed at saving the European concept of nation state from the bankruptcy into which it was thrown by the Second World War. 1 England and France, but also Germany and Italy managed, in the course of the last forty years, to reconstruct their economies, return to levels of integration similar to those prior to the First World War and to receive substantial assistance in doing so from the United States, the great promoter of European integration. At the same time, they tried to stay away from the idea that their big brother across the sea had of integration, that is, the establishment of a continental economic space like the one in the United States itself: the founding countries of the European Community managed to maximise trade within Europe while maintaining productive national structures, each with a more or less complete industrial matrix.


Stronger Industrial Specialisation

Until ten years ago, this statement could be made without fear of rebuttal. But in the last decade, that is, with the launching of the Delors Plan, the European single market, the passing of EU directives concerning banks and the reinforcement of the EU Commission’s Directorate on Competition, a new phase of integration has begun which has strongly limited the capacity of the various members states to defend their industrial structure. The European states tried to oppose the new integrative trends in every way, but only Germany has actually succeeded in doing so. The industrial structures of the other countries have been subjected to substantial restrictions, to the point that their productive and business specialisations have sharply increased.

It is hard to attribute this entirely to the integrative pressures of the single European market. While such a policy has indeed been pursued by EU countries, the economy of the entire planet has been undergoing an incredibly strong drive towards integration—the phenomenon of globalisation to which so much attention has deservedly been dedicated. Thus, the specialisation of European countries has often taken place with respect to the entire world economy, not just the single European market. An outstanding example of this is the virtual abandoning by EU countries of the production of computers, in particular PCs, with the consequence that these products are now imported from the United States or Asian countries. Another fitting example is the integration of financial markets, which has certainly gone beyond the confines of the European single space to embrace the entire planet.

It has been said, in light of these phenomena, that it was useless for Europe to try to integrate at the European rather than at the global level since European countries maintained the main barrier between them anyway: their exchange rates. Indeed, European countries acknowledged the fundamental importance of removing this barrier to favour further integration at the European level in 1978 when they entered into an experiment of joint fluctuations which, by the late eighties, had taken on the characteristics of a declared process of monetary union. But it is equally well known that the intention first to jointly fluctuate the currencies in the European Monetary System (EMS) and later reach monetary union ended in a series of failures, probably brought on by exogenous events such as the vicissitudes of the dollar and the yen and, above all, the reunification of Germany, triggered by the collapse of the Soviet bloc and subsequently of the Soviet Union itself.


A Core and a Periphery

It is these very vicissitudes, however, that informed the way in which the more recent steps in European economic integration have been taken. Numerous economists, including the author of this article, have pointed to the formation of a central core and a periphery within the EU as a consequence of the monetary events of the last fifteen years. If one looks at their trade structure, it can be seen that the trade relations of countries such as Italy and Spain, but also Great Britain, have come to differ from the model exhibited by the countries that were able to keep their exchange rates fixed with respect to the mark. And this becomes even more evident when the level of intra-industrial trade is considered, as it reveals the specialisation and integration among the central countries of the European Union more easily.

It can also be said that the adversities of the exchange market further reinforced the tendency of countries with weak currencies, like Italy and Spain, to specialise in the export of products with low technological and high labour content, while progressively abandoning, and this is particularly true of Italy, the export of investment goods and high-tech products. The contrary seems to have taken place in France and to some extent in Great Britain, while Germany has manifested a greater capacity to maintain its exporting and industrial structure, if one excludes the debacle of electronics exports, which has affected the entire continent, including Germany.

A rapid glance at the structural profiles of exports of the major European countries is enough to see the way in which Italy stands out. Like Germany, Italy has a strong export presence in the mechanical industry, but within that sector it is very weak in the export of goods produced with important economies of scale, such as automobiles, while Germany has in recent years strengthened its already strong presence in the high-quality part of that sector. Alone among developed countries, Italy is still strong in the fashion sector, in textiles and shoes, and has a strong presence in what are called other manufacturing goods, with a greater dispersion of its exports than other major European countries.

Like the united Germany, but unlike other major European countries, Italy’s exports are heavily concentrated in only some of its regions: in Italy they are those of the centre-north, whereas in Germany they are the western Länder. Therefore, like Germany, Italy is heavily polarised in terms of income and employment. But while fifty years of policies directed at the south have not been able to change the conditions in Italy, the policies aimed at reducing the gap in Germany have not been in place for more than a few years; as such, it will only be possible to measure their efficacy in the future.


Italy’s Sustainability

At the beginning of this article, mention was made of the Bundesbank’s continual lamentations about Italy. To a large extent they are about Italy’s ability to stay in the monetary union if it enters from the beginning. If one extrapolates from even recent Italian behaviour, the scepticism of the German central bank is not totally incomprehensible. Each time there has been a serious disorder in the international monetary system, Italy and the central European area have been on opposite sides of the fence. Soon after the Smithsonian Agreement of December 1971, for example, the lira exchange rate had to be left to fluctuate and was then sharply devalued, while the opposite happened in Germany. Focussing on more recent events, moreover, the relief offered Italy by the precipitous fall in interest rates allowed the servicing of the public debt to drop to one half of what it was only two years ago. But, even at the present level, it absorbs double the percentage of GDP that it absorbs in Germany.

If the events of recent years are reconsidered, another unsettling fact becomes evident: the decrease in the exchange rate of the dollar with respect to the mark and the French franc which culminated in autumn 1996 clearly showed that the German and French economies cannot tolerate the over-evaluation of their currencies for long. The incident brought to light problems in the two countries’ productive structures which, although better equipped than that of Italy to deal with a strong exchange rate, would not have been able to handle the situation for much longer. Valery Giscard d’Estaing’s revolt against the Bundesbank, backed by Helmut Schmidt and accepted by the Americans to prevent catastrophe in the Japanese economy, came just in time to save the two economies central to Europe from an extremely bleak fate: their rush to delocalise industry was turning into an industrial debacle in the heart of Europe. As is known, the recovery of the dollar coincided with that of the lira, which regained all that it had lost with respect to the mark and the franc in the devaluation of 1995-96. In the last 18 months, all the advantages that Italian industry had previously acquired vanished, but it still does not seem to be in the ruinous state in which the French and Germans found themselves at the time. Moreover, the drop in interest rates has greatly helped Italian industry, as well as public accounts, as has the concomitant fall in the prices of raw materials.

Nevertheless, the French and German authorities realise that a revaluation of their currencies with respect to those of Spain and Italy as well as those of the dollar area, that is, Asian countries, would throw their productive structures into serious difficulty. Conversely, the recent appreciation of the lira has made it possible to assess the rebalancing of Italy’s public accounts and the new credibility that the Italian central bank has acquired both domestically and abroad. Because of the past need to give priority to the prolonged crisis of public accounts, the room for manoeuvre of the Italian central bank had gradually dwindled; but with the improvement in public finances, it has largely regained its initiative and these virtuous dynamics could become even stronger in the future.

Continuing low inflation—now that the Italian economy seems to have achieved a growth rate that is not only export-led but also based on the dynamics of internal demand—will certainly have extremely positive effects on the import content of manufactured products and will prevent the kind of speculation that took place in the past on important raw material prices.


The Gap between Italy’s North and South

All of these factors must, however, be considered in light of the strong dualism of the Italian economy, which involves full employment in the strong areas of the country in the centre-north and unemployment levels that are equal to or even higher than those of the east German Länder in the weaker areas in the south. The traditional solution to this gap was importing manpower to the north from the south. But this has stopped in recent years and labour requirements in the north are now being satisfied by migrants from outside the European Community.

In the future, if one of the consequences of monetary union turns out to be a more accentuated productive specialisation within the single currency area, it is not difficult to imagine a further strengthening of the strong sectors of Italian industry and a further weakening of those that have been struggling to get by in recent years. The former include the fashion and mechanical industries, the latter what remains of the sectors characterised by economies of scale and a high research and technology component. Crisis may therefore be foreseen in Piedmont and the Taranto area, while the northeast and parts of the northwest, where the mechanical and textile industries are mainly located, will have difficulty in satisfying foreign demand.

Absolutely critical will be Italy’s ability to solve the one crucial problem of its south: crime. If, in fact, it is true that services in the southern regions are lacking, it is also true that the kind of industry which tends to be relocated towards those regions does not require sophisticated services, as it is often the same kind that is relocated to countries outside the European Union, which certainly do not offer better services than southern Italy; the level of crime in those countries is not much lower either.

After the rebalancing of public accounts, therefore, Italy will have to tackle the social problem of the Italian south. As in the case of public finances, this essentially calls for the political will to do so. Large regions such as Campania and Apulia, which do not have traditions of widespread organised crime, could be recovered in a short time and opened up to agricultural, tourist and industrial development without an enormous initial investment. There have been numerous examples of “bottom up” industrialisation in recent years which demonstrate how easy it would be to solve the problem. There have also been numerous successful cases of “top down” industrialisation. The many automobile factories that have been established in the south show how easy it is to relocate to the south if one really wants to. Another example was the steel industry in Taranto, when it was still allowed to make use of all of its facilities before the restrictions imposed by the European Union. It is also well known that much of what is left of the Italian aerospace industry has been transferred to the south, and its problems are surely not related to the quality of manpower or the obsolescence of the plants.

The internalisation of intra-European trade after monetary unification will, therefore, accentuate the trends already underway in Europe. Given that Italy has already resigned itself to the role of supplier of high-quality products in traditional sectors, in which innovation can still be the outcome of individual intelligence and initiative and does not require a shrewd state-level production and distribution policy, if the state manages to deal with the problem of crime in the southern regions with the same determination it has shown in rebalancing public accounts, one can imagine a positive future for Italian industry, with the exceptions of automobiles and perhaps steel. As far as the steel industry is concerned, the fact that the plants are modern may, in fact, make them competitive enough even within a single currency area in which there are strong competitors. For the automobile industry, on the other hand, the main problem is with assembly, given that the producers of parts and components are now integrated with the German and more generally European automobile industry. The ideal solution would be a gradual reduction in assembly plants—something that is unlikely to take place without trauma, given the characteristics of the plants and demand—and a possible alliance of Italian producers with foreign groups.


The Future in Services

Thus, while the future of the Italian manufacturing industry, if the current capacity to control prices and costs continues, fails to look good only to those who illuded themselves that their country could play a more important role in the great challenge of world technology and to those who worried about a possible correlation between types of production and a country’s level of political and civil maturity, the prospects for the country’s enormous service sector in a single currency context look much worse. Worse in that the research and decision-making centres of the various branches of this heterogeneous sector will tend to relocate. Actually, not even France and Germany are in the forefront as far as levels of production and employment, or productivity and efficiency in the services are concerned, especially the financial sector and many high value added services.

Yet this is precisely where the future of European employment lies, given that industry’s future capacity to absorb manpower is generally considered limited and on the decline. This is at least what one is led to believe by extrapolating from the experience of the last twenty years. It has already been seen that the Italian industrial structure, less centred on large plants than that of Germany or France, still provides some hope for future job creation. But the real possibilities—still extrapolating from the experience of the last decade—lie in the service sector, especially if one looks at the example of the United States. The communications revolution which is currently underway opens up previously unexpected horizons for the production of services with economy of scale in many sectors, which could mean the specialisation of enterprising suppliers of homogeneous services throughout the entire single currency area. There are still enormous obstacles to standardisation, starting with the existence of national languages, but this does not seem to pose a problem in many sectors. Therefore a huge wave of concentrations, acquisitions, mergers and successive rationalisation can be expected in many service sectors.

This is especially the case of financial and information services and all those related to the production and distribution of entertainment, especially television entertainment. In many of these sectors, the top producers are Americans who have long captured an important share of the new single European market. It is not exceedingly pessimistic to think that only a few large European producers will be able to survive American competition: those that already know how to operate in a large single market in that they started out in their own countries and then expanded to the global level. It is likely that in many cases the only competitors will be German, in some cases also French and English. In the banking sector, for instance, the future of Italian banks lies in the retailing of products produced in important foreign financial centres by a few very skilled operators. This has already proven the case in investment banking, but it seems clear that it will also apply to securities and managed savings. Again, as with industry, resigning oneself to a subordinate role ensures survival, but no one in Italy would deceive themselves into thinking that they can create a financial centre on the global scale, as the Germans still seem intent on doing.

Insurance is another sector in which a rapid German escalation is already manifest, while concentration and reorganisation in the telecommunications sector is also in full swing. The fact that Italy has a big market with a big spending capacity ensures the presence of large companies and many jobs for Italian workers. But it is over-optimistic to think that control of these firms will be in Italian hands. At best, the major private Italian groups will manage to keep some kind of presence in the sector through a minority interest in large foreign groups. But the organisational centres will certainly not be in Italy. In general, it is easy to predict a future for all these sectors similar to that of pharmaceuticals: low-production plants will remain, but organisational and research centres will be totally or almost totally relocated.


The Brain Drain Continues

The sector in which there will almost certainly be a definitive impoverishment is university education. The jobs available in Italy after reorganisation of production and services at the European and global levels will call for a relatively low level of education. The emigration of a large part of high-tech and research activity and the definitive contraction of large industry will lead to a decline in the level of university research and therefore in university education. Italian universities, even more than at present, will be downgraded to institutions for the selection of intelligent young people to be sent on to foreign centres of education and research. Given the current situation in Germany, it seems unlikely that such centres will be located there. Yet by maintaining and increasing their large organisations for the production of goods and services, the Germans will at least be able to offer their young people, upon their return from American universities, where they have been sent to complete their education, jobs of adequate intellectual level. This will certainly not be the case for Italian youth, for whom emigration may well be the only way to guarantee a career in keeping with their level of education.

All of this has already been going on for many years, especially in certain professional fields. But the reorganisation of the European market triggered by the single currency will make it even more frequent and widespread. Unfortunately, the inability of Italian governments and public opinion to understand this problem has been and continues to be disconcerting. Foolish considerations are made about the marvels of Silicon Valley and Venture Capital, without realising that both are the offspring of great Californian universities and the impressive research budgets ensured them by private and government funding. As always, a successful private sector is the product of a long-sighted and well organised public sector. But in Italy, and seemingly also in Germany, public opinion and the government have not realised that letting universities deteriorate and turn into places for mass exams will lead to the extinction of outstanding research and of the transfer of inventions to the private sector in the form of innovation.


Modernisation of the Public Administration

A number of years ago, on the eve of what was to be Europe 92, that is, the launching of the single European market, and ended up with the drastic devaluation of the Italian lira, the author wrote that the single market and currency union would be positive for those countries that equipped themselves in a timely fashion with efficient and modern public administrations and would ruin those that allowed obsolete public sectors to survive or, worse, ingenuously believed that the single market and the single currency would allow them to do without a state. 2 This was an easy prophecy and it has, indeed, come true. Italy, for example, was forced as a result of its previous lack of foresight to dismantle a large part of its state-owned industry in a very short time, throwing years of investments and huge amounts of resources out the window in an attempt to gather enough capital first to curb and then reverse the spiral of public debt—and especially to gain credibility on the international financial markets on which the country depended for its financial recovery and which were not well disposed towards state-owned industry. No other country carried through so many privatisations in such a short time. Yet one of the victims of this accelerated dismantling of the state-owned sector has certainly been the vision of the role that the public sector should play in a country like Italy once the single market and the single currency have been achieved.

The same does not seem to have occurred in the rest of Europe and in particular in Germany. There, rationalisation of the public sector has been going on gradually and apparently with a much clearer idea of the final objectives being pursued. Public banks, for example, have been exempted with regard to concentrations from interference by the EU Directorate of Competition after being the object of a ukase by Chancellor Kohl at the Amsterdam Summit. Since then, there have been two mergers of public banks, one in the south and one in the north of Germany and others are soon to follow. Nevertheless, it does not seem that foreign banks have gained a controlling interest in the German banking sector, which has always been the heart of that country’s economic system. The same thing seems to be taking place in the insurance sector. Gerhard Schröder recently nationalised the Preussag steel works in Niedersachsen because the owners intended to sell it to the Austrian Voest Alpine company before the elections. Yet there have been no reports of objections from the German federal government nor from Karel Van Miert, always ready to condemn the Italian government. Nor do there seem to be any plans for privatisation of the eastern German Leuna refinery which employs 5000 people and is a sinkhole for public resources.


The New Nature of Economic Sovereignty

From initial indications, it seems that Milward’s prediction of some years ago that unification would take place while the structures of national industry and infrastructure remained unaltered seems not to hold only in countries such as Italy where the public administration has been incapable of modernising to meet the challenges of European and global integration and the single currency. The other major European countries and in particular Germany have managed to use the public administration to help national production forces to keep their independence in sectors considered strategic and to establish intricate networks of alliances at the European and global levels. Despite continual declarations to the effect that Europe has fallen into the hands of the European Central Bank and the European Commission in Brussels, it seems rather evident that Europe’s industrial policy is being worked out for the coming years by the major groups in the various countries with the vigorous support of their national governments. On the other hand, it would be strange to expect anything else.

Not many people in Italy seem to be aware of the new nature of economic sovereignty inside the single market and monetary union. Most seem to think that all governments will disappear, just because the Italians cannot stand theirs and cannot wait to be governed by Brussels and Frankfurt. But people in other European countries have no such thoughts. They have faith in their administrators and expect them to represent their interests adequately in European institutions. In building the new geography of public powers in Europe, is it evident that the declared trend towards ever greater subsidiarity will be to the advantage of those countries that have managed to set up modern and efficient local authorities. Even the ultra-centralised French state seems to be aware of this new reality and has set about stimulating its local authorities— with extremely effective results, according to the Italian businessmen that have tried to start up activities in other parts of Europe.

Local authorities are traditionally strong in a country with such a long federal experience as Germany. Even Spain has very highly developed local autonomies. Italy’s regions and municipalities are, instead, just beginning to wake up to the realisation that they will be in the front lines of Europe in the next few years, competing and collaborating with other local authorities, and that they will be responsible for a large part of the new economic policy. In the better organised countries, the central state is teaching local authorities how to move in this new context; it does not look as though the Italian state is doing much, even though there have been a few sporadic examples.



In the new context of European unity, most Italians will probably be able to survive without much difficulty, in fact they may well reach unprecedented levels of individual prosperity. It seems much less likely, however, that large Italian economic institutions will be able to survive, that is, that such public and private institutions will continue to be able to regulate their future, to work out strategies or to set up advantageous alliances with similar institutions in other European countries that do not imply their subjugation or, worse yet, their disappearance. It is more probable that they will be taken over by some foreign-controlled partner which will do the same in other European countries. At lower levels, small and medium-sized Italian businesses may well expand to other parts of Europe, perhaps even more successfully than their European sisters. But when they reach interesting dimensions, they will be absorbed by large European groups, while it is highly unlikely that large Italian groups will absorb medium-sized foreign companies.

This is the model of integration that can be envisaged in Europe in coming years. Certainly, it would not be a negative development if all sovereignty ceased to be national and were handed over to a new grand European nation. But judging from the new Europe’s first steps, the survival of the model pointed out by Alan Milward seems to be ensured for some time to come. Thus, the single market and monetary union will no doubt lead to less nations in Europe, that is, less aggregations of economic power able to regulate their fate, but it will not do away with all of them. The Italians will not participate in the working out of the industrial policy of the European Union, as the Germans and the French will, but once it has been plotted, there will be a space in which Italian enterprise can grow and prosper.

This may be difficult to accept for those Italians who have a sincere and honest national spirit, like their far more numerous European counterparts. But traditionally they have always been only a few in Italy and after the lost war they number even fewer. The euthanasia of Italian sovereignty will be looked upon with indifference by most Italians and even with enthusiasm by many of them. And if a few thousand brilliant young people have to go abroad to study and later pursue a career, this certainly does not bother the many millions of citizens who are not concerned about not having control over their own fate. The parabola which started with the Risorgimento has described its course.


Marcello de Cecco is Professor of Monetary Economics at the University of Rome “La Sapienza”.



*: This article is a revised version of a paper presented at the conference on “The Euro and its Consequences for Europe, the International System and Italy”, organised by the IAI with the sponsorship of the Ligurian Regional Administration and the Cassa di Risparmio di Genova e Imperia, and held in Genova on 20-21 March 1998. Translation is by Gabriele Tonne.  Back.

Note 1: See, for all, his “The European Rescue of the Nation State” (London: Routledge, 1992).  Back.

Note 2: See M. de Cecco and G. G. Migone, “La politica economica estera” in S. Romano and R. J. B. Bosworth (eds.) La Politica estera italiana, 1860-1985 (Bologna: il Mulino, 1991).  Back.