Friedman is now dead while Mundell is 85, but the events in Italy may be bringing us closer to a resolution of the argument. So it is worth remembering the key points made by the two luminaries. Mundell, of course, pointed out the numerous and rather obvious benefits of a common currency, such as the dollar in the United States, Friedman believed that the “political consequences of a monetary area that is not coterminous with a political entity” would result in instability. He also believed that Europe had too many rules and regulations and lacked sufficient economic freedom to make the experiment successful. More fundamentally, though, he argued that the euro was an effort to achieve political objectives by economic means and that, more than anything else, doomed it to failure.
Today, with an euro-sceptical government in power in Italy, the first such government in a EU founding member, we may be close to finding out who was right. Unfortunately, the argument that has flared out in the aftermath of the swearing-in of the Lega – 5 Star government in Rome has been anything but civil. Partisans of the latter have accused Germany of crushing Italy’s economy and even of pursuing Nazi domination objectives in Europe by other means, while the Germans and European Commission president, Juncker, just as hysterically have slammed the Italians for being lazy, undisciplined and profligate. The factual information backing these wild accusations may go a long way to providing an answer to the likely outcome of the conflict. And here, the Italians have most of the data working in their favor. Not necessarily, proving that they have been a victim of economic manipulation by others, but explaining why most of them feel that way.
And the data shows that far from being an economic basket case, let alone Greece-like dissemblers, the Italians had a very distinguished economic record until they joined the euro. It is true that they changed their governments about as often as most people do annual Spring cleaning (65 governments in 72 years), but that did not prevent them from amassing an outstanding record. Beginning in 1951 and for more than 30 years, Italy grew economically at over 5% per annum and passed the United Kingdom in 1987 as the third largest economy in Europe. Then it joined the euro and stopped growing. According to the latest figures available, between 1999 and 2016, the country has had zero growth and its income per capita, which equalled the German one in 1999, is now at $34,200, while the latter stands at $45,500. There could be and probably are other reasons for this dramatic decline, but it is easy to see why for most Italians the euro is the real culprit.
On the other side of the equation stands the European Central Bank (ECB), dependent as it is on German dictates and European Commission mandarins, and its record has been anything but stellar in the 20 years since its founding in January 1999. Its modus operandi has been throwing money at each and any problem it encounters by printing it at the expense of European savers, who often dealt with near zero interest rates. Beginning with 700,000 euros, the ECB now has 4.5 trillion euro on its books of mostly worthless government and private bonds that, at best, are worth 2.5 trillion. How this gigantic debt would be unwound is anybody’s guess and nobody at the ECB or Brussels has any clue. More likely, if something cannot continue, it will not!
But there is more. As Victor Davis Hanson reminds in a brilliant new piece, the 75 year old Pax Americana has broken down and it is yet unclear what’s going to replace it. Trump’s election was a hopeful sign, but a reflection rather than a catalyst of the demise of the status quo. As far as Europe is concerned, the events in Italy are part and parcel of the long-overdue rebellion of the peasants against their new overlords. As Hanson has succinctly explained the problem, “The often-crude imposition of democratic socialism, pacifism and multicultaralism under the auspices of anti-democratic elites, from the Atlantic to the Russian border is spreading, not curbing, chaos.” The serious discomfort Italy is causing the European elites may be the most hopeful sign yet.