Sometimes it is not appreciated quite how industrial Italy is. It has long been Europe's second-biggest manufacturing power, beaten only by Germany. Italy is far more industrial than France or the UK. In some areas of design and high-quality manufacturing, Italy is still without peer.

However, since it gave up the lira and adopted the euro - in effect Germany's currency - things have gone pear-shaped. This economic calamity is driving Italian politics, leading many to question the euro and Italy's membership of it.

From 1945 to 1995 there was an understanding that Italy would devalue the lira. This is what Italy did. Traditionally, it devalued the lira every few years. This kept Italian industry competitive.

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The gradual fall in the value of the lira was a price that the Italians were prepared to pay for industrial success. Contrary to the dogma spouted by Europe's central bankers, Italian devaluations worked particularly well.

From 1979 to 1998, Italian industrial production outpaced that of Germany by more than 10 per cent. Italian equities outperformed German equivalents by 16 per cent - after having taken into account the devaluations.

So not only was Italian industry growing faster than German industry, aided by lira devaluations, but also the return on capital in Italy was higher than in Germany.
...
Then came the euro.

Is the Euro entirely to blame or were there other factors? And why does Italian industry become so systemically uncompetitive without regular devaluations? What is so intrinsically "Germanic" about the Euro, especially with Draghi as President of the ECB and the "unconventional" measures he has adopted?

Would leaving the Euro now solve all these problems or is devaluation as an economic policy tool no longer the the cure-all suggested in this article? Would leaving the Euro not result in far higher interest rates and ultimately inflation offsetting any short term benefits of devaluation leading to a need for a never ending cycle of devaluations?

And Finally, is there even a mechanism (equivalent to A.50) for leaving the Eurozone, or is that process, in itself likely to be chaotic and catastrophic? Brexit is certainly a process far easier to manage because the UK has its own currency, but will that fact, on its own, enable Brexit to be a "success"?

I am wary of the simplistic cause and effect advocated by this article. Would it not be better to tackle the underlying causes of Italian uncompetitiveness rather than relying on currency manipulation to hide them? In an increasingly integrated EU economy, would reverting to the Lira not be a backward step, even if the transition to the Euro created considerable difficulties?

I appreciate devaluation is often preferable to deflation, but is it not possible to manage an economy without either? Italy's economic problems seem to be caused far more by stagnant productivity, stagnant corporate structures, stagnant legal and governmental structures, regional and class inequalities, and a culture of entitlement.

La Dolce Vita was always about living now and paying later, and perhaps not paying at all. Blaming the Euro seems a convenient excuse and cop-out.

Index of Frank's Diaries