Euro notes and coins are arranged for a photograph in London, U.K. (Photographer: Chris Ratcliffe/Bloomberg)

Is the Euro to Blame for Italy’s Economic Woes?

(Bloomberg Businessweek) -- Dario Calogero is still as enthusiastic about the euro as he was at its birth 20 years ago.

Back in 2000, when the single currency was barely one year old, his financial-services startup landed a €1 million ($1.13 million) investment from a venture capital fund. Calogero’s bank in Italy, though, was unable to accept such a large transfer into his pioneering euro-denominated account. So the tech entrepreneur had to place 28 checks in a briefcase, walk to his bank branch in Milan, and personally deposit the money.

“I saw the euro as a big opportunity for Italy at the time, and I still think this has been the case,” he says from the New York offices of Kaleyra, now a global company with about $100 million in sales this year.

Most of his fellow Italians didn’t have it so good. Gross domestic product per person has stagnated since the euro became the official currency in 1999, unemployment has barely fallen, and productivity has declined.

Is the Euro to Blame for Italy’s Economic Woes?

“The euro has been a disgrace,” says Roberto Calletti, whose family-run shoemaking business went under in the early years of the euro. “As an entrepreneur, I lost most of the markets to which I could export, because we lost competitiveness.”

Two decades after Europe’s common currency made its debut, the debate as to whether the euro has been good for Italy rages on. The League and the Five Star Movement leveraged the discontent of voters like Calletti to catapult themselves into national office in elections held in March. Some politicians have mused publicly that Italy could abandon the euro—a scenario that the media have dubbed Italexit—fanning investors’ fears that the country might end up defaulting on its large stock of debt. Amid the uncertainty, made worse by the populist government’s wrangling with the European Union over budget targets, the economy might have slipped into recession in the second half of 2018.

So who’s right—the euro enthusiast, Calogero, or the hater, Calletti? To answer that question, it’s instructive to look at the performance of the 10 countries that, along with Italy, were in the first batch of adopters.

Their economies have fared well under the single currency. Germany reformed its labor market and rebounded from the doldrums of reunification, its export engine humming stronger than ever. Spain has sky-high unemployment but also lower taxes; despite falling victim to the European debt crisis, its economy has grown more than four times as fast as Italy’s since 1999. Even reform-averse France consistently outperformed Italy, and to a larger or smaller extent, smaller countries from Netherlands to Ireland to Portugal also benefited. (Greece didn’t take up the euro until 2001.)

Is the Euro to Blame for Italy’s Economic Woes?

What did Italy do wrong, then? One frequently invoked argument is that the euro amplified many of the country’s long-running weaknesses while limiting policymakers’ maneuvering room. “Low growth in Italy is a phenomenon that dates back a very long time before the euro,” said European Central Bank President Mario Draghi during a Dec. 15 speech in Pisa commemorating the single currency’s 20th anniversary.

“Through the 1980s and early 1990s, the country started to live somewhat above its means, as indicated by the rising trajectory in public debt, while devaluations allowed the economy to remain competitive,” says Marco Valli, chief European economist for UniCredit SpA in Milan.

The first decade of the euro coincided with the onset of Chinese competition and the digital revolution. Italy, Europe’s second-largest manufacturing hub, saw the competitive edge of its companies shrink, especially for smaller companies, but politicians were unable to intervene with their long-favored tool—devaluing the lira—to make exports cheaper.

On the flip side, the single currency made it less costly for Italy to service its debts: Financing costs were more than €20 billion a year lower than in the pre-euro years, because having the European Central Bank in charge of monetary policy made investors feel more comfortable. Yet policymakers didn’t take advantage of the additional breathing room to get their house in order: Public spending ballooned to more than 50 percent of gross domestic product in the years before the crisis, while debt failed to shrink significantly.

Is the Euro to Blame for Italy’s Economic Woes?

Italy—unlike Spain—didn’t clean up its banking system after the debt crisis, leaving lenders saddled with soured loans and unable to reverse a credit crunch until well into 2017. But the real Achilles’ heel has been weak, almost nonexistent productivity growth. There’s a vast academic literature that tries to pinpoint the cause of this chronic underperformance. The problem is that leading politicians don’t appear to be familiar with it. In the 57 pages of the current government’s coalition agreement, there’s only one mention of “productivity,” notes Nicola Nobile of Oxford Economics, and it’s part of a discussion of the judicial system.

Among the various explanations that have been put forward are a rigid labor market and bloated public sector, too much nepotism and too little investment in education, and the small size of most companies. Again, all these factors long predate the euro.

Is the Euro to Blame for Italy’s Economic Woes?

In the first decade of the euro, Italian companies took advantage of the lower interest rates to step up investment. But that wasn’t enough to boost productivity and stem the decline in competitiveness. With the debt crisis, capital spending plunged and is still a long way from recovering.

Of course, the past 20 years have not been without progress. Italy’s ranking in global competitiveness league tables has improved of late, banks have reduced their bad-loan burden, exports have risen. More than a million new jobs have been created since 2013.

Some of these hard-won gains are now in jeopardy. As a condition for adopting the euro, countries pledged to abide by prescribed deficit and debt ceilings. In recent weeks, Italy’s populist government has waged a very public battle with its European partners over its spending plans, unnerving bondholders.

It’s worth noting that, as headlines about spiking yields on Italian debt call up memories of 2012, popular support for the euro has surged. An October poll has 57 percent of Italians saying the euro is a good thing for their country, up 12 percentage points from a year earlier.

For Calogero, the tech entrepreneur, it’s maybe a sign that Italians are waking up to the fact that the single currency isn’t the root of their problems. “The issue for Italy is not the currency but the way of doing business. There is a cultural hand brake,” he says. “Without the euro, Italy would be in a mess today, and I say this as a citizen and as an entrepreneur.” —With Giovanni Salzano

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