Opinion

Anatole Kaletsky

Italy refutes the idea it’s on Europe’s “periphery”

By Anatole Kaletsky
August 22, 2012

The words “core” and “periphery” have become standard terms to describe the winners and losers in the euro crisis. But how could anyone with the slightest sense of history, or knowledge of art and culture, call Italy or Spain peripheral to Europe, while placing Finland and Slovakia, or even Germany and Holland, at Europe’s core?

As a part-time resident of Italy, with a home 100 km from Rome, the center of two millennia of European civilization, I could not be satisfied with this trite answer. Speaking to friends and neighbors in Italy this summer and observing the behavior of Europe’s leaders, I have been struck by a more interesting, and disturbing, explanation of the core-periphery split. These terms do not refer to the past or the present, but to plans for the future. Core and periphery are not geographic or historical descriptions, but euphemisms designed to legitimize permanent economic and political inequalities among the nations of Europe.

With every step toward a resolution of the crisis, the peripheral countries have lost political autonomy, economic opportunity and national self-esteem, while the core countries, especially Germany, have been enriched and empowered. By creating conditions in which the interest rates paid in Italy, Spain and the other Mediterranean countries are much higher than they are in Germany and its northern allies, Europe has imposed a large and permanent economic handicap not only on the governments of southern Europe but also on their private businesses and households.

Even the most profitable Italian businesses and the most solvent Italian homeowners are forced to pay double or even triple the interest rates of their German or Dutch counterparts. When Italy had a separate currency from Germany, this interest inequality did not matter because the lira was periodically devalued, thereby reducing the real cost of debt. But while the euro survives, the widening disparity in financing costs provides continuous subsidies for German companies, while stunting the competitiveness of Italian and Spanish businesses with terrible implications for job creation and economic growth.

Until recently, there has been surprisingly little protest in the peripheral countries against this manifest injustice. People seemed to swallow whole the German and northern European, narrative that presents Mediterranean economic inferiority and political subservience as natural consequences of geography and national stereotypes. In Italy, however, a change of mood became noticeable after Mario Monti, the country’s unelected but universally respected prime minister, started pushing back against German reform demands at the EU summit on June 29. In the past few weeks, this resistance has been gaining strength.

Italian politicians have become increasingly vocal in demanding radical measures from the European Central Bank to reduce interest rate spreads that are devastating Italian industry. Significantly, these Italian demands for ECB action now go well beyond the bromides offered by Mario Draghi, the president of the ECB. Draghi has disappointed his compatriots by insisting that any ECB measures be contingent on ever more German-inspired austerity measures. Italian ministers all the way up to Monti, by contrast, are now demanding unconditional action from the ECB to reduce credit spreads, with no further German demands for austerity and reforms.

A few months ago, Italians almost universally dismissed such defiance of Germany and criticisms of the ECB as futile gestures unworthy of serious post-Berlusconi-era politicians. In the past few weeks, however, this perception has begun to change. After three years of deep recession, massive tax increases, huge spending cuts and some of the most ambitious structural reforms implemented in a major OECD economy, there is a sense that Italy has done enough.

People are starting to re-examine the standard German narrative that Italy has recklessly mismanaged its finances, that its industry is hopelessly uncompetitive and that loss of economic and political subservience to Berlin or Brussels is therefore a natural fact of life. Italians are reminding themselves that: Italy’s tax revenues are strong, it has run bigger primary surpluses than Germany for most of the past 15 years, health and pension liabilities are now among the lowest in Europe, employment costs are lower than in France or Germany, trade deficits are negligible, and personal savings are higher per head in Italy than in Germany, the U.S. or Japan.

In short, Italians are realizing that they are not just some insignificant pimple on the “periphery” of Europe, but a country similar in population, wealth and economic output to Britain and France. They are also recalling that their country did as well or better than Germany, in terms of economic growth, wealth per head and industrial production, from the early 1950s until 1999, when Italy made the fateful decision to join the euro. That decision is now seen as a mistake by a plurality of 44 percent, against 30 percent, of Italian voters, who are starting to suspect that EU reform demands, far from making their country more competitive, are designed to reduce it to a position of permanent vassalage to Germany.

All of which suggests a dramatic conclusion. Instead of accepting further austerity and reform, Italy could insist that Germany stop making these demands or leave the euro. France, Spain and the others would then face a choice – back Italy and challenge Germany to leave the euro, or vice versa. We would then discover which countries are truly in the core and which in the periphery of Europe.

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