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Italy and the euro – a mistake or a prerequisite for growth?

Italy is among the first countries to adopt the euro as the only legal tender, replacing
the pound, the currency used until now. Italy, together with ten other European Union (EU)
member states are among the “founding members” of the euro area and the euro as a currency
common to the countries of the Union, which are uniting their efforts to deepen the European
integration processes and remove obstacles to the free movement of goods, people and

The euro was introduced in Italy on 01.01.1999 and the so-called “transition period”,
which is designed to give consumers and businesses the opportunity to build up their
expectations and strategies for action in view of the coming major change last three years.

From 1 January 2002 until 28 February 2002, the period during which both the euro
and the lira could be used as legal tender in Italy continued, but from 1 March 2002 the lira
lost its status as legal tender and citizens who still had lira could exchange them free of
charge until 2012 at the territorial branches of the Bank of Italy.

Like other EU countries that have replaced their national currency with the euro, Italy
has seen a “traditional” surge in the prices of goods and services offered by different business
sectors since the introduction of the euro. This rise in prices can be explained in several ways.

First, some analysts point to the adoption of the euro as the leading cause of the rise in the price of goods and services, in this case before the financial and economic crisis of 2007-2008. This is due to the pound’s exchange rate against the euro, the perceived exchange rate (based on currency markets) being 1 euro = 1936, 27 pounds, which shows how much weaker the pound is compared to the euro. As a result, goods and services are expected to become twice as expensive, while at the same time, there is no evidence that employee wages have changed materially so that ordinary people can absorb the difference in the two currencies.

Secondly, other experts are of the opinion that the adoption of the new currency, while
having some impact on the rise in prices of goods and services, is not the leading factor that
led to this increase. The problem is rooted in the profiteering carried out by traders and other
representatives of the business sector, who take advantage of the ignorance and lack of price
awareness of ordinary consumers, as well as the method of converting the pound into euros,
in order to unjustifiably increase the value of the goods and services they offer. In fact,1
Italians are used to comparing prices and following market trends in the lire and, since the
introduction of the euro, citizens have been forced to compare the 1936 lire with one euro, but
the euro is a much stronger currency than the lire. In this context, it is normal to accept the
statement ‘the poor have become poorer and the rich have become richer’.

The problem of profiteering is “universal” in all countries that are introducing the
euro, because it is a known fact that the lack of information among consumers is key for
businesses – the less informed the latter are, the easier it would be for traders to increase
prices and shift the “blame” for this on the euro.

Thirdly, the problem of high prices not followed by wage increases is also explained
by some experts by the low productivity of the Italian economy (“productivity”2 ). The article
cited briefly explains Italy’s lack of productivity by the following formula:

Low productivity = stagnation of wage rates.

A country’s productivity depends to a large extent on its ability to integrate people and
capital, especially technological progress and employee skills. The process of such
integration in Italy has long been delayed and began to intensify (by “coincidence”) with the
introduction of the euro. The same analysts point out, however, that Italy’s competitiveness
(Italy’s “competitiveness”3 ) has not shown a deterioration, on the contrary, the volume of
goods and services exported has increased by an average of 0.9% per month before the crisis
(2007-2008) and by 0.85% since the crisis period. This is noted as an indicator that Italian
businesses are open to competition in international markets and manage to compete with their
competitors despite the lack of a national currency (lira) and exchange rates against the same4.

Of interest regarding the euro integration process in Italy is the greater number of
positive analyses and evaluations of the introduction of the new currency. The positive
dimensions of the introduction of the euro stand out in several directions.

On the one hand, the introduction of the euro and the entrusting of the monetary
policy management process to the European Central Bank (ECB) has, according to some
analysts led to lower inflation rates in a country like Italy, which has been characterised by
price booms since before the 2007-2008 crisis.

On the other hand, the euro has allowed lending institutions, and especially banks, to
lend at significantly lower rates than in previous periods5. By October 2008, the “prices” of
loans reached the levels of late 1998.

The trend in lending rates is also linked to another factor, namely government bond
yields, which provide a floor for lending prices. The introduction of the euro was met by a
fall in ten-year government bond yields, which ranged between four and five per cent for
several years and then rose to around six per cent during the crisis. By comparison, in the pre-
eurozone era, ten-year yields never fell below 8.8%.

Another advantage of the euro that is highlighted is precisely the integration of the
Member States and their presence in the financial markets. Italy is no exception to this
conclusion: between 1999 and 2003, funds generated directly on the market by companies
issuing shares, bonds and other instruments increased from 31 to 65 billion euros. During the
same period, the amount of “financial wealth” of Italian households in the form of corporate
securities rose from 22% to 36% of GDP6.

The cited article also points out that “the single currency has had a particularly large
impact on the European corporate bond market, leading to a significant increase in the
number of mid-sized companies placing issues in countries other than their home countries.
The integration of capital markets has facilitated the consolidation of financial structures by
strengthening cross-border links between companies. This is exemplified by the large flows
of foreign direct investment between euro-area countries recorded in recent years (including

Next, many experts point to the euro’s strength as its ability to be a powerful weapon
in the fight of economies against financial crises. Many businesses, including in Italy, are
benefiting greatly from the advantages of the euro. Between the 1970s and the mid-1990s
there were several cases of high volatility in exchange rates and interest rates in Italy, as in
many other European countries. Without the single currency, the events of recent decades –
such as the crisis triggered by the terrorist attacks of 11 September in the United States or the
fluctuations in international currency and stock markets – would have caused further
instability in Europe and in the economies of many euro area Member States, including Italy.

This, of course, does not mean that external factors have ceased to play an important
role in determining economic trends in euro area countries. However, during the crisis
between 2001 and 2003, euro area economies still reacted better to external shocks than in the
early 1990s; in the former case these shocks were mainly due to stock market price
corrections and financial instability, and in the latter to exchange rate volatility7.

In conclusion, the introduction of the euro and the abolition of the familiar national
currencies cannot be defined either as a negative or as a positive phenomenon, but rather how
we will characterise such a change depends to a large extent on the policy to be undertaken
by the Bulgarian government.

The problem of profiteering by traders and artificial price rises for goods and services remains on the agenda, as does the problem of increasing labour productivity and the introduction of new-age technology into various industries to optimise production and other business processes.

Even a country such as Italy, due to the lack of innovative innovations, ‘suffers’ from low labour productivity and a lack of ability to compete on a global level with economies from all over the world, especially with Asian businesses and firms increasingly entering international markets. Perhaps it is right to look at strategies and policies that will facilitate the introduction of new technologies, and the optimisation of the work process and thus make Bulgaria’s economy competitive – first and foremost in the European market, characterised by the free movement of goods, people and capital, facilitated precisely by the introduction of the euro as a single currency.

1 Dalla Lira all’Euro. Dall’Euro alla Lira?, Manzini S. Daniele
3 There again
4 There again
5 There again
6 L’Italia senza l’euro –
7 There again