The euro as a currency is too strong and is weighing on business competitiveness, particularly in weaker nations such as Italy, France, Spain and Portugal. At least this is the view that has been making the rounds in political and economic circles, backed by shock slogans for the weak-minded in an attempt to find easy scapegoats for a crisis that, unfortunately, continues to show its effects on the economy. And it’s a view that must be acknowledged in order to respond with actual facts—as is to be done as part of any good, pragmatic culture of enterprise—to waves of anti-Europe sentiment, which is what could actually put the Italian economy at great risk.
An overview of the risks was printed on the front page of Il Sole24Ore (on 5 February) in an article by Davide Colombo, who wrote that abandoning the euro would lead to both an immediate shift in spreads and consequent unsustainability of Italy’s public debt, as well as trigger double-digit inflation and an enormous increase in energy costs. In such a context, he wrote, devaluation would not be enough to relaunch exports or boost GDP, given that global value chains have already discounted the competitive advantage of each individual nation.
To better understand this, we should look at what factors businesses actually rely on in order to remain competitive. As Marco Fortis, vice-president of the Edison Foundation, explained as part of an analysis of “Italy’s new manufacturing” (which was the topic of an interesting Aspen-Assolombarda conference held last 27 January in Milan), in the export race Italy lost 29% market share in manufactured products from 1999 to 2012. This was the same as the loss seen in the US, but much less than the declines posted in the UK (-45%), France (-39%) and Japan (-33%). Germany performed the best of all (losing just 6%), but all things considered, Italy held its own just fine. Italian manufacturing is struggling because of the crisis on the domestic market (due, above all, to the significant austerity policies), but in exports we continue to grow, having posted a positive manufacturing balance in 2012 of USD 113 billion and an even stronger USD 130 billion in 2013, with this growth being expected to continue. In many industry segments, we export more than Germany, and—even more interesting—Italy is in second place, behind China, in number of non-food products, posting a positive trade balance even greater than that of Germany. In other words, Italian exports are on the rise even in highly innovative areas, such as in automation and specialist engineering. Of the four segments that most characterize Italian exports, automation is going even stronger than interior design, fashion or food and beverages.
Furthermore, our exports are going well particularly in areas of high value added and in the segments that feature the highest levels of innovation. The numbers? The traditional industry segments (textiles/clothing/leather goods, furniture, jewellery, non-metalliferous minerals) accounted for 70% of the manufacturing trade surplus in 1996 (before the euro), but only 35% in 2012 with the euro. In other words, the makeup of Italian export success has shifted radically towards more innovative products and to segments with greater value added and greater competitive potential.
So going back to the Italian lira with this type of manufacturing industry would be a disaster for both competitiveness and exports.
The research unit of Confindustria has added other elements to document how the effect of a weaker currency would not help either exports or GDP. The first concerns the rise of the global value chain, the new configuration of the traditional supply chain. Italian industry thrives on transformation and so imports semi-finished goods (which account for as much as 60% of all imports). A weaker currency would increase costs and reduce the margins of businesses that transform these goods into finished products. Secondly, there would be the rapid rise in energy costs, which are already a significant burden on Italian enterprise (and one of the factors with the greatest negative impact on Italian competitiveness). Thirdly, we would see an increase in the cost of credit, which would especially penalise small and medium enterprise. In short, there may indeed be some theoretical benefit—in terms of price—of a weaker currency for businesses that export, but it would be quickly offset, nullified or turned on its head by the this dramatic increase in costs.
And that’s the fundamental issue. Italian industry competes globally based on quality, not on price. After the arrival of the euro, we learned to overcome the distortions caused by the bad habit of competitiveness based on a weaker currency and found our niche in “medium high-tech” (which the president of Assolombarda, Gianfelice Rocca, pointed to as the cornerstone of excellence in Italian manufacturing). The “pocket-sized multinationals” and a large part of the 4,600 mid-sized to large-scale corporations surveyed by Mediobanca, and which represent the core of Italy’s “industrial pride”, have succeeded over the years thanks to innovation and quality, and this is Italy’s strength which is to be defended.
So to remain competitive, we don’t need demagogic ramblings about the end of the euro and a return to the lira, but rather sound decisions in industrial policy, both in Italy and at the highest ranks of the EU. Anything less is a path to ruin.