- - Thursday, June 7, 2018

The European Union’s common currency and lax immigration enforcement have done much to smother prosperity and suppress wages for ordinary workers. As in America, the intelligentsia and governing elite drink the Kool-Aid that the robust growth the West enjoyed from 1870s to 1970s was a historical accident and opposition to illegal immigration is anti-growth and racist.

That’s nonsense. New technologies like artificial intelligence and robotics offer vast new pathways to raise living standards with modestly growing populations if businesses have the wherewithal to invest prudently.

Unfortunately, the euro established in 1999 locks Europe into a single currency that is undervalued for the more efficient German and other Northern European economies and undervalued for other less-modern European states. And like America before President Trump, the EU — largely at the behest of France and Germany — is locked into the false notion that trade problems with China can be resolved in the World Trade Organization (WTO).

Initially, the single currency allowed all European governments, businesses and private citizens to borrow more and this created a false prosperity. It enabled excessive welfare spending and a run-up of property values.

The illusion of a sustainable prosperity prevailed, but ultimately government finances and banks collapsed in Greece, Italy, Spain, Portugal, Iceland, Ireland and Cyprus. Then EU financial rescues imposed Germany imperial prescriptions — perpetual trade and budget surpluses for Germany and burdensome taxes, crushing debt service and economic servitude for Mediterranean and other peripheral states.

In varying measures, these policies have restored stability but only temporarily — in particular, it is doubtful that Italy can avoid another debt crisis even with the severe austerity — and at a terrible price of lost hope.

Since 2004, Italy has not grown. The traditionally poor South now has 30 percent of its population at risk of poverty — up from 26 percent before the financial crisis. The more prosperous and industrialized North, riveted by imports from Germany and Asia, has lost too many factory jobs.

Most Italian voters are disgusted with center-right and center-left parties that have governed for decades. Much like the folks who elected Donald Trump, the majority cast ballots for antiestablishment parties offering radical change.

The Five Star Movement, co-founded by comedian Beppe Grillo and now led by 31-year-old Luigi Di Maio, promised every citizen a guaranteed annual income and more generally, a break from the status quo ante — an Italian version of clean up the swamp. It won 36.4 percent of the vote.

The League promised a lower, flat tax — business taxes, as in America before President Trump, are smothering investment in the industrialized North — and tough immigration enforcement. It snared 17.7 percent of the vote.

Astonishing almost everyone — including themselves — these two parties have managed to achieve a post-election alliance. Both are Euroskeptics — whether we are talking about the common currency or the gang in Brussels that would just as soon have Athenians eating grass than admit the euro was a mistake.

The new coalition did not promise to bolt from either the euro or broader EU, but their ambivalence toward the German marionettes in Brussels is clear. The combined consequences of implementing a guaranteed annual income and a flat tax at 15 percent for individuals and 20 percent for corporations would surely cause a break with EU budget and austerity rules that are central to continuing the single currency.

If carried through, these policies could easily cause sovereign-debt and banking crises that would either force Italy’s exit from the euro or force the Germans to accept fundamental reforms in how the eurozone is run. These include large German budget deficits, larger EU budgets substantially financed by Germany and significant reduction in Germany’s trade surpluses — enabled by more imports from poorer member states like Italy.

France, Germany’s big partner in enforcing orthodoxy on the Mediterranean states, might cozy up to such an agenda but that is not likely. Culturally, French governments don’t like rule breakers and false pride requires that France, not Italy or another lesser state, provoke Germany to change.

Much of what the new coalition policies proposed is folly — Italy needs fiscal discipline as much as it needs the flexibility of its own currency. But if those precipitated a crisis that ended the euro, all this insanity could be followed by something more reasonable.

Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.

Copyright © 2023 The Washington Times, LLC. Click here for reprint permission.

Please read our comment policy before commenting.

Click to Read More and View Comments

Click to Hide