The Stability of the Euro and the Role of Italy: Ambassador Giulio Terzi speaks on the European financial picture to the members of Gruppo Esponenti Italiani (G.E.I.)
The following is a reprint of the speech given by Ambassador Giulio Terzi at the February 17, 2011 G.E.I. Luncheon.
I am delighted to be here with you again today and honored by your invitation, a most welcome sign of your great friendship. The last time I had the pleasure of being with you – as Permanent Representative to the United Nations – I talked about international security issues. Over the last year and a half, I have somehow changed my perspective – but not too much: in Washington, diplomatic work is at once global and bilateral too. Today I would like to address a topic which has both a global scope, as it relates to the world’s monetary system, and a “bilateral” one which refers to relations between the EU and the US: I am referring to the stability of the euro-zone.
Since the stability of Europe’s single currency is pivotal for our business here in the United States, I believe it is very important to cast light on its real value both for European economic integration and for the health of the global economy.
It was therefore only natural that in May last year, President Napolitano put this topic high on the agenda of his conversation with President Obama and with Congressional leaders. And it is only natural that I and other colleagues from the euro-zone, when given the opportunity, focus on this theme.
Indeed, we feel that in many layers of the American public opinion there is a dangerous lack of information, and even prejudices, in understanding what is happening in Europe, in terms of a stronger economic governance and of reinforcement of the tools available to respond to an economic crisis which the EU has suffered rather than provoked. A more balanced information and the correction of undue euro-skepticism could be beneficial to our economies. More confidence in the euro could entail positive consequences for the growth of the whole Transatlantic economy:
First of all, it could strengthen investors’ confidence – a very important aspect given the fact that in 2008 US direct investments in Europe amounted to 1,8 trillion dollars, over four times all US investments in Asia; As a second consequence, it could foster private and public partnerships and innovation, and be particularly beneficial to medium and small businesses; In the third place, it could prove to be vital for the fiscal sustainability of budgetary policies of the euro-zone and beyond.
On the contrary, American skepticism on the future of the euro would be most detrimental. Among those who are inclined to this kind of approach, let me mention Paul Krugman and his article recently published in the New York Times Magazine.
Krugman appears to question the very foundations of the euro. However, he concludes by setting Europe a challenge, and expresses the hope that European leaders will be able to take the necessary steps to save the common currency.
A glance at recent developments in Europe and at the history of the single currency leads us to respond to many of these observations and to conclude that European leaders have provided the very answers called upon by Krugman. My intention is obviously not to refute these authoritative and solid economic theory arguments. I only would like to point at some political factors which, in my opinion, are of great relevance to the analysis.
It is true that, from the outset, Europe could not be defined as an “optimal currency area.” But the euro was born with a political commitment by the European countries to deepen and strengthen the ties that bind them together. Caught in the perfect storm of a deep crisis, unprecedented in our generation, European leaders demonstrated their capacity to work together quickly and decisively to coordinate an appropriate policy response.
By facing the threats to the stability of the Euro, the European Union has been able to tackle not only the symptoms, but also the root causes of their problems. Observers have often been focusing too much on the sometimes noisy internal debates.
But if we look at the substance of decisions that were taken, we may find that European leaders are already providing for the response that Krugman invokes, simultaneously addressing fiscal consolidation, structural reforms and strengthening the governance of the euro. We must not forget that in less than twelve months – a break-neck speed in political terms – the EU has unveiled a comprehensive package to restore financial stability and avert contagion from the Greek crisis. Indeed, on February 4, the European Council examined the so-called “competitiveness pact” in view of an overall agreement, to be discussed by the Eurogroup first and, subsequently, by the extraordinary E.U. Summit at the end of March. In return for a stricter fiscal discipline, the European Financial Stability Facility (EESF), which can provide lending up to 440 billion euro, might be strengthened further so as to ensure sovereign debt sustainability in the short and medium term. To avoid future crises, by 2013 a permanent financial safety net will be created – the European
Stability Mechanism – to provide further aid to Countries struggling to balance their books.
The European Council is preparing a new round of stress tests for European Banks which will be conducted under more rigorous criteria than last summer, under the auspices of the new European Banking Authority that was established by a recent regulation of the European Parliament and Council and which started operating in January. Let me mention, with great satisfaction, that this new Authority is headed by an Italian, Dr. Andrea Enria.
Strengthening the governance of the euro, a fiscal consolidation plan and the start of structural reforms in Eurozone Countries have transformed the crisis of the euro into an opportunity. It is not fortuitous that the proposal of a European Debt Agency that would issue E-bonds, suggested by the Italian Finance Minister Giulio Tremonti and Prime Minister of Luxembourg Jean-Claude Juncker, is gathering increasing support. It is the embryonic beginning of a common fiscal policy. Even Mr. Krugman seems to like the idea, albeit considering it only a “small step” towards fiscal integration.
The euro/dollar exchange rate in the weeks preceding the European Council shows that markets granted credibility to the European response. The euro rallied against the dollar to 1.38 in the full swing of the Egyptian crisis, as positive opinions on the euro were also reported from Davos. The theory of the vicious circle, therefore, seems to be contradicted by the timely European response.
Yet, the underlying question is: is the euro worth all these efforts? Let us take a glance at the history of the first decade of the common European currency.
In the first ten years following its introduction, the average rate of inflation in the euro-zone was 2.3%, amounting to 30% less than in the previous decade. Monetary integration encouraged economic growth and contributed to a massive increase in employment. Trade and investment flows between Euro member States grew significantly – quite the opposite of what Krugman argues – and the common currency has fostered competitiveness, an increased price transparency and a significant reduction in transaction costs.
But, as one might argue, that was before the crisis.
So how would the recent financial crisis have unfolded without the euro? The euro protected member states from the worst effects of the 2008 financial crisis. It not only prevented countriesfrom pursuing currency devaluations instead of addressing the root causes of their problems, but also managed to avoid exchange rate turbulence between euro area countries that would have been highly detrimental to trade and investment flows, and ultimately to jobs, in Europe.
Finally, absent a European Central Bank, individual central banks would have struggled to coordinate liquidity provision.
Today, despite the problems in the European countries which have been most hit by the sovereign debt crisis, the average deficit of eurozone countries was 6.3% of 2010 GDP, well below many other advanced economies such as the United States (10.5%) and Japan (7.7%).
Over the last few months, a comeback of the manufacturing sector in Europe shows how growth is again gaining traction.
As was stated here in New York last December 10 by Bank of Italy Governor Mario Draghi, who is also Chairman of the Financial Stability Board: “The euro is not in question. The euro is one of the pillars of European economic integration and all countries, all individual countries, have greatly benefited from that.”
Italy has definitely benefited from the Euro. Although, undeniably hit by the crisis, my Country has fared better than many others thanks to four specific strengths, which are directly or indirectly related to Italy’s participation in the euro.
First of all, the Italian banking system weathered the global financial crisis relatively well, thanks to limited exposure to toxic assets, the absence of a real estate bubble, retail-based business models, and a sound supervisory and regulatory framework.
Secondly, [private debt is far below that of many other advanced economies. Household net wealth almost doubles the value of GDP when considering only the financial assets, and reaches five and a half times GDP if real estate property is included.] Household debt to GDP ratio is among the lowest in the eurozone. If we look at the overall debt of the Italian economy, both public and private, its ratio to GDP is amongst the lowest in advanced economies.
In third place, fiscal discipline has already been in place for some years. The appetite for Italian government bonds, which remains very high, is a proof of the credibility of these measures.
Finally, Italy’s industrial system is based on a robust and competitive manufacturing sector, strongly export oriented and with a pro-innovation bias, both of which are prerequisites to competitiveness in today’s global economic environment. In the decade of the euro, the level of internationalization of Italian small and medium enterprises has risen significantly.
Since the very beginning of the crisis Italy has always supported a strong, collective and coherent response within the European Union. It has participated in the system of bilateral loans and guarantees implemented for those Countries facing difficulties. My Country has advocated the creation of the European Financial Stability Facility which will be replaced, in 2013, by a 500 billion euro permanent financial safety net, the European Stability Mechanism. Italy also strongly supported the adoption, last year, of “Europe 2020 strategy for growth and employment”.
The economic performance of the eurozone is nevertheless closely related to global growth. Growth policies must increasingly be the result of coordinated efforts at a global level. Italy has therefore actively participated in the G20 as the best governance tool to promote global coordination on measures needed to face global economic imbalances.
This year’s French Presidency of both the G8 and the G20 is an excellent opportunity for Italy to contribute to defining a shared platform on many global economic issues: reform of the international monetary system, food safety, innovation, energy efficiency, and the reduction of the volatility of the prices of raw materials. On the latter, Prime Minister Silvio Berlusconi’s proposal on addressing speculation on raw materials scored an important success at the Seoul Summit. As proposed by Italy, it was agreed that shared guidelines for regulations, aiming at creating regulated and transparent markets rules will be identified and submitted to the G20 Summit this year.
Whatever shape the global economic governance will eventually take, the future of our economies is about winning the race for competitiveness. In the new global economic environment, where we face competition “not between Countries, but between Continents”, as Minister Tremonti recently noted, transatlantic relations are of absolute strategic importance. Let us look at some figures.
Exchanges between the European Union and the United States account for the largest portion of international trade and their daily volume amounts to three billion dollars. In 2010 Europe’s direct investments in the United States created 70 per cents of jobs originating from foreign investments.
Former Prime Minister Giuliano Amato, in his foreword to an essay on the foreign policy of the E.U. edited by Professor Federiga Bindi and published just a few months ago, noted that “Europe and the United States have more in common with each other than either does with anyone else in the world. (…) Europeans and Americans have the common responsibility to support their vision on the rule of law, on the respect of human rights and the empowerment of people and on sustainable economic growth in the new multipolar arena”.
The E.U-U.S. Summit in Lisbon on November 20, 2010, finally put aside the discussion on whether this traditional alliance still makes sense. Lisbon has set the basis for strengthening the transatlantic market. The Transatlantic Economic Council (TEC) has been tasked with pursuing the harmonization of standards, so as to provide for an authoritative example to other emerging Countries such as China, addressing non tariff barriers to trade, innovation policies and intellectual property, which today are crucial to international competition. Italy is closely following this process and firmly believes that it is of strategic importance to foster growth and employment on both sides of the Atlantic.
The success of the euro is therefore crucial – and beneficial – to both the United States and Europe.