The New York Times

June 19, 2005

Kicking the Euro When Europe Is Down

By ROGER COHEN

ROME PERHAPS no proposal has been as suggestive of Europe's current disarray as the one made this month by the Italian labor minister, Roberto Maroni: It is time, Mr. Maroni suggested, to scrap the euro and bring back the lira.

The lira? If the German mark was the backbone of Europe's common currency, the lira was its dangling limb. It was the funny money with too many zeros, too many denominations and too many devaluations to count. Not so long ago, Italy's unlikely qualification for the euro was a source of national pride.

Mr. Maroni, 50, has been sharply criticized, not least by other members of the center-right government led by Silvio Berlusconi, but the other day at his ministry - a building surrounded by protesting pensioners - he was unrepentant and unbowed.

"The euro has to go," Mr. Maroni said. "It has caused devastating price increases for the average family, and made the small and medium-size companies that are the core of the Italian economy uncompetitive. A return to the lira is technically possible, and we will pursue the possibility of a referendum on this issue."

Nobody seriously expects a lira comeback, but when a European government minister dismisses the euro, it is a serious matter, even if he is an Italian maverick from the populist Northern League Party. The fact is, the long-term future of the euro is a central question posed by the European Union's recent upheaval.

The shared money that replaced national currencies in 2002 was always as much a political as an economic idea. It symbolized the pursuit of a European political union. Without such union, the French and German backers of the euro argued, the new money would be orphaned.

But with the French and Dutch rejection of a European constitution two weeks ago, momentum toward further political integration was lost. The time of the orphans is upon Europe. The European Union budget is in dispute, Europe's direction unclear. The "pause for reflection" called for by European leaders last week in Brussels is an admission of paralysis.

This paralysis was evident in the suggestion from the French president, Jacques Chirac, that further expansion of the 25-member E.U. was inconceivable "without the institutions capable of making this expanded union function efficiently." Turkey, in other words, will have to wait because the union is rudderless.

A fundamental European conflict has taken hold between the French-German-Italian push for federation (embodied by the euro) and the British-Polish-Scandinavian stand for a Europe that is more free trade area than cohesive political entity. Because the more rigid economies of the former grouping are not as dynamic as those of the latter, Europe's unifying forces are faltering.

As a result, the euro looks like a money without any prospect of a European government to back it. "In the long term, a monetary union without political union is unthinkable," said Alberto Majocchi, an economist who is president of Italy's Institute for Studies and Economic Analyses.

Even in the short term, Europe's lack of political coherence can cause economic problems in the euro zone.

The Italian economy is in recession. Before the advent of the euro, Italy could always devalue the lira in order to spur growth by making its exports cheaper and, in that way, more attractive.

BUT that exchange-rate flexibility is now gone; Italy must compete on the same playing field as Germany. The problem is that it is not selling high-tech machinery or superb automobiles. Some of Italy's main export industries are in sectors like shoes, textiles and clothes that are particularly vulnerable to Chinese competition. Because trade issues are handled at the European level, the Italian government has little room to maneuver.

The link between citizens, their representatives and executive action is more cumbersome in Europe than in the United States - and that is a source of animosity toward Brussels eurocrats. Peter Mandelson, the European trade commissioner, has now negotiated some limits on Chinese textile imports, but the anger that feeds populist calls for a return of the lira will also persist.

"Everywhere I go, I find support," Mr. Maroni said. "More than 80 percent of Italian companies have fewer than 15 employees. They are suffering. Has Britain suffered from sticking with sterling?"

What he did not say is that Britain pulled off in the 1990's something Italy has avoided: the shift, which also occurred in the United States, to an economy with a strong service sector and less manufacturing.

"Our former growth was artificial, based on the lira's continued depreciation and accumulation of government debt," said Tommaso Monacelli, an economist. "Of course, people get nostalgic. But the euro should be seen as a productive constraint obliging the development of a high-tech service sector and forcing family firms to innovate."

The problem, of course, is that such structural adaptation is painful. With elections next year, Mr. Maroni's Northern League will continue to push the lira as a vote-getter. Mr. Berlusconi will not openly encourage his allies in this, but he doesn't seem likely to express outrage: his four-party coalition needs all the support it can get.

A recession and an electoral campaign amount to a heady brew. Anti-euro and anti-European slogans will be flying, even if the lira's return would sink Italy (the country's credibility would be shot and the costs of its debt servicing would soar).

In effect, lira-nostalgia is a measure of Italy's and Europe's craving for easier choices, a harking back to a time when global competition could be finessed with soft money. But a time of hard choices has come.

Just how hard is suggested by the bust of Marco Biagi in the entrance to Mr. Maroni's ministry on the Via Veneto. The leftist Red Brigades assassinated Mr. Biagi in 2002, three months after the euro's introduction, because he was an architect of measures to bring greater flexibility to uncompetitive Italian labor markets.

Roger Cohen writes the Globalist column for The International Herald Tribune.