With the Italian public increasingly disenchanted with the euro, the country’s parliamentary election in March could lead to the introduction of a “new lira” as a parallel currency.
Following Italian President Sergio Mattarella’s dissolution of parliament on December 28, 2017, Italians will vote on March 4 to elect representatives to both chambers of the country’s legislature. Ultimately, a new prime minister will assume office in an electoral landscape in which three of the four main parties in the polls favor introducing a dual currency.
With Matteo Renzi’s ruling Democratic Party struggling to secure allies, (Financial Times) polling predicts a three-way coalition, of former prime minister Silvio Berlusconi’s revived center-right Forza Italia party, the regionalist Northern League and the nationalist Brothers of Italy, will win the most votes.
Although currently leading all parties in the polls, the anti-coalition, populist Five Star Movement is likely to be kept out of power by other parties due to a 2017 electoral law that critics argue favors coalition forming.
Opinion polls predict that a hung parliament is the most likely outcome.
But some analysts anticipate a right-leaning coalition will form a government with a mandate to introduce a new, domestic-only currency to operate alongside the euro.
This worries many eurozone leaders. In August 2017, Berlusconi publicly indicated his support for printing a “new lira” for domestic use in Italy. The European Commission then stated that the euro was the only legal currency in the eurozone.
“There are no exceptions to this rule,” a commission spokesman said (Reuters).
The proposed implementation of a parallel currency would leave the euro in use for all international transactions and would continue to be used by international tourists.
Once among the eurozone’s most ardent supporters, Italians are now among its greatest skeptics, according to European Commission figures.
Italy correspondent for The Economist, John Hooper, told WikiTribune that current levels of euroskepticism in the country are “mainly because of the single currency.”
“The introduction of the euro in Italy was accompanied by a big increase in prices, and particularly in the price of houses,” Hooper said.
Many Italians blame the euro for a rise in living costs, lamenting that prices seem to have doubled overnight when the single currency was implemented in 2002 (Financial Times). The current rate of youth unemployment in Italy stands at 35 percent (Statista), among Europe’s worst. Though improving at its fastest rate since 2010, economic growth has been consistently sluggish since the 2008 global financial crisis (Economist), leading to widespread frustration and increasing levels of Italian emigration (Financial Times).
Euro losing support
General anti-euro sentiment is intensified by the design of Italy’s economy, Leila Talani, author of The Political Economy of Italy in the Euro, told WikiTribune.
“The Italian export-oriented manufacturing sector has lost out from a constantly overvalued currency and from the impossibility to adopt competitive devaluations as a competitive tool,” Talani, who is also an economics professor at King’s College of London.
“Given the constant positive inflation differentials with Germany, Italy has progressively lost around 25 percent competitiveness in the EU export market since the adoption of the euro,” she said.
Despite forecast improvements of the eurozone’s third-largest economy (Reuters), Italy’s slow growth is already putting pressure on the euro. Italian public debt currently stands at 132 percent of GDP, the eurozone’s largest debt after Greece.
The Greek economy remains reliant on its creditors, notably Germany, and many economists believe it will never manage to escape its public debt without “significant forgiveness from its investors,” according to Politico.
“What happened to Greece has frightened many Italians who fear their country could one day go the same way,” Hooper said.
“I think there has also been a deeper and more valid reason for skepticism about the euro, which is a growing feeling that the single currency was framed in such a way as to benefit Germany, and that the countries of the south will suffer as a result.”
Impact of ‘new lira’ would be massive
The prospect of a Salvini-led coalition is possible. The Northern League and Berlusconi’s Forza Italia are both polling at about 15 percent, and Berlusconi is banned from standing for office following a 2013 tax fraud conviction (BBC).
Salvini has said in the past that “we need a strong country that is not subordinate to Europe. With its own currency, for example.” (Washington Post)
Berlusconi said in an interview with Italian newspaper Libero Quotidiano that a parallel currency would help Italy regain “monetary sovereignty in a way that supports domestic demand.” (Financial Times)
However, Roberto Perotti, an economics professor at Milan’s Bocconi University, told Reuters that while “technically and politically” possible, the impact of a dual currency would be severe.
“It would increase public debt, Brussels would object and especially if done on a large scale it would make it more likely we are eventually forced out of the eurozone,” he said.
Forza Italia’s August 2017 announcement of its support of the proposed domestic currency sparked investors to sell off Italian government bonds.
While dual-currency rhetoric from opposition parties has replaced more radical calls for Italy to leave the euro altogether, the potential reintroduction of the lira could be a “long road to euro exit.”
However unlikely, an eventual Italian break from the EU could be disastrous for the eurozone.
“A breakup of the EU – and Italy’s pulling out would mean just that – would be a geopolitical disaster,” wrote Steve Forbes in a 2017 Forbes story.
Political rhetoric may not translate into action
The introduction of a new currency in Italy is anything but certain.
Talani said Italy’s political parties would never introduce a domestic currency for parallel use: “They are just saying it now to win the election.”
Hooper said that Italian politicians simply wanted to capitalize on the “grumbling in Italy about the euro without actually committing themselves to leaving the euro, let alone the EU.”
Even if a coalition of Forza Italia, the Northern League and Brothers of Italy succeeds, there remain significant policy differences between Forza Italia and the Northern League and public disputes have erupted between leaders Salvini and Berlusconi in the past.
Berlusconi said in a radio interview on January 9 that “Salvini is no longer of the idea that we should leave the euro.” However, this view was then contradicted by the Northern League’s head of economic policy in a television interview, underlying the continuation of policy disagreement between the potential coalition partners (Reuters).
Hooper said such a situation represents the worst possible scenario for Europe.
He believes a euroskeptic coalition would ultimately prove beneficial for the eurozone.
“If they can put together a coalition that commands a majority, I think there would be a mixed reaction. The markets would heave a sigh of relief. It would mean the worst scenarios – deadlock and a populist coalition involving the Northern League and the Five Star Movement – had been averted.”