Options for Europe – Part 44

The title is my current working title for a book I am finalising over the next few months on the Eurozone. If all goes well (and it should) it will be published in both Italian and English by very well-known publishers. The publication date for the Italian edition is tentatively late April to early May 2014.

You can access the entire sequence of blogs in this series through the – Euro book Category.

I cannot guarantee the sequence of daily additions will make sense overall because at times I will go back and fill in bits (that I needed library access or whatever for). But you should be able to pick up the thread over time although the full edited version will only be available in the final book (obviously).

[NEW MATERIAL TODAY]

Italy and the Italians at Maastricht
The EMU gave these new elites a chance to place Italy into a modern Europe and they took this Pro-European approach to the IGCs in 1990. The Italians wanted to be seen as a serious player in the ‘new’ Europe rather than part of the rabble or periphery. After all, between 1950 and 1990, Italy led Europe in per capita income growth (and was only second in the work to South Korea) and this performance brought Italy up to that of France and Germany. As a result, “Italians thought they had made it back into the fold of the developed world … and they looked forward, as members of the Exchange Rate Mechanism of the European Monetary System (EMS), to European monetary unification” (De Cecco, 2007: 763).

While the Italians were small players relative to the might of Germany and France they nethertheless, played a significant role in the Maastricht process. The Italians were clearly on the side of the nations that wanted Germany to take more responsibility for adjusting the Deutsche Mark upwards within the EMS rather than force devaluation and higher interest rates onto the external deficit nations. But after the Basel-Nyborg Agreement in 1987, the EMS nations agreed to rely more on interest rate adjustment rather than currency realignments to maintain the agreed parities. By 1990, Italy was running significant fiscal deficits in an effort to boost domestic demand and stave off the rising unemployment. This macroeconomic stance was at odds with the emerging Monetarist culture in Italy promoted by the central bank officials in tandem with the Finance Minister, Guido Carli, who had previously been the Governor of the Banca d’Italia and was one of the key Italian negotiators in the IGCs and onto Maastricht.

Carli, in particular, saw the EMU as the ‘vincolo esterno’ which would force major changes in domestic Italian policy culture (Carli, 1993). Fiscal deficits were blamed for the higher interest rates as if there was a direct causal connection. The connection, of-course, was that Italy had fixed its exchange rate, which meant that the Banca d’Italia had to defend it through higher interest rates. Anything that promoted domestic spending and hence higher imports would put downward pressure on the Lira and invoke the central bank’s reaction. Carli knew that if Italy was a part of the EMU, then the Banca d’Italia would effectively be forced to take on the culture of the Bundesbank and prioritise price stability (Carli, 1993). As a result, the Italians accepted the German approach to transition to the EMU, which would require both fiscal and monetary discipline being imposed domestically for a number of years.

But even though the Italians went along with the Germans and the popular perception was that the Maastricht Treaty represented a German victory (Fratianni, 2000: 158), the reality is more nuanced. The reality was that “the German position had been considerably watered down by the group led by France and Italy (Fratianni, 2000: 158). In particular, the Dutch had proposed that the European Council would set the date for Stage III at which time the list of qualifying countries would be determined. Carli was implacably opposed to this and the result was the date was left in abeyance (Carli, 1993; Fratianni, 2000).

Further, Carli led the way in ‘softening’ the fiscal convergence criteria so that a literal interpretation would give way to what Fratianni called a “dynamic” interpretation (p. 158) whereby Italy could claim to have qualified as long as its public debt ratio was moving in the right direction, even though it would certainly remain above the 60 per cent ceiling that was defined in the Treaty (see also Cangelosi and Grassi, 1996).

But despite Italy’s exploitation of the strength of Germany’s desire to be part of Europe and hence its willingness to compromise on key ‘monetary’ principles, the real politic meant that Italy was also up against the skeptics who considered it (and certainly Greece) could never meet the convergence criteria that would be required to ensure all nations entered the EMU on a viable footing. The German Finance Minister Theo Waigel led the chorus of critics. By the time the details of the Maastricht Treaty were being consolidated this skepticism had significant ramifications for internal politics in Italy and the rules specified under what became known as the Stability and Growth Pact (SGP), which was finally adopted by the European Council in 1997 and based on a 1995 submission by Theo Waigel. After Italy had put a draconian fiscal package of spending cuts and tax increases in 1998, Waigel was quoted as saying that “Italy has achieved remarkable success” (James and Friedman, 1998). He might have reflected on the fact that unemployment was already above 11 per cent and rose again during that year.

The other impact that Italy had during the Maastricht process related to Britain’s position on Europe. While the simmering relations between the two European powerhouses France and Germany attracted a lot of attention in the negotiations leading up to Maastricht another bilateral intrigue was going on – the disdain for Italy by Margaret Thatcher and the skilful manouvering by the Italians that effectively cost Thatcher her Prime Ministership. Bindi (2011, 2013) relates how in the second half of 1990, the Mario Andreotti held the Presidency of the European Community and proceeded to push his Pro-European case. He accelerated the process by calling the informal (out of schedule) European Council meeting in Rome on October 27-28, 1990 where Guido Carli’s proposals were accepted despite fierce opposition from Margaret Thatcher. When Thatcher returned to London, she made a statement to the House of Commons on October 30, 1990 about the Rome European Council Meeting (House of Commons Hansard, 1990a). Opposition leader, Neil Kinnock accused her of undermining the farm subsidy negotiations at the Rome meeting and that “her tantrum tactics will not stop the process of change” but just “strand Britain in a European second division without the influence over change that we need” (House of Commons Hansard, 1990).

Thatcher replied by attacking France and Germany and argued that EMU would be an imposition on Britain’s sovereignty and that they “would not be prepared to have a single currency imposed upon us, nor to surrender the use of the pound sterling as our currency” (House of Commons Hansard, 1990a). She then delivered her famous tirade which produced the headline in the Sun tabloid newpaper two days later “Up yours, Delors”. She said (House of Commons Hansard, 1990a):

Yes, the Commission wants to increase its powers. Yes, it is a non-elected body and I do not want the Commission to increase its powers at the expense of the House, so of course we differ. The President of the Commission, Mr. Delors, said at a press conference the other day that he wanted the European Parliament to be the democratic body of the Community, he wanted the Commission to be the Executive and he wanted the Council of Ministers to be the Senate. No. No. No.

The strident anti-European sentiment expressed by Thatcher created further dissent within her own party and two days later, on November 1, 1990, the Foreign Minister Geoffrey Howe resigned from the Cabinet, citing Thatcher’s poor handling of British interests in Europe as the reason. On November 13, 1990 he made a farewell speech to the House of Commons where he said that Thatcher had defied advice from the Chancellor of the Exchequer and the Bank of England on the EMU and that her stance on Europe was a “tragedy” and “that the Prime Minister’s perceived attitude towards Europe is running increasingly serious risks for the future of our nation” (House of Commons Hansard, 1990b). Michael Heseltine challenged for leadership two days later and with mounting pressure, Thatcher quit as Prime Minister on November 22, 1990.

In her memoirs (Thatcher, 1993) scolded Howe for being “either disloyal or remarkably stupid” for suggesting that Britain did not oppose the “principle of a single currency”. But it was Rome that was the final blow and Andreotti and Carli were significant players in isolating Thatcher from the European debate, and, ultimately, from her position of power in Britain.

As we will see, Italy and Britain also featured in a major crisis just seven months after the Maastricht Treaty was signed, which threatened to undermine the whole EMU process. Not only would Black September 1992 rock Italian pride as it was thrown out of the EMS but it would also confirm Britain’s tenuous European credentials.

But we are moving ahead of ourselves.

[TO BE CONTINUED]

Additional references

This list will be progressively compiled.

Bindi, F. (2011) Italy and the European Union, Washington, Brookings Institution Press.

Bindi, F. (2013) ‘Even in Death, Giulio Andreotti Defeated Margaret Thatcher One Last Time’, The Huffington Post, July 5, 2013.

Cangelosi, R. and Grassi, V. (1996) Dalle comunità all’unione. Il trattato di Maastricht e la conferenza intergovernativa del 1996, Milan, Franco Angeli.

Carli, G. (1993) Cinquantíanni di vita Italiana, Rome, Editori Laterza.

Della Sala, V. (1997) ‘Hollowing out and hardening the state: European integration and the Italian economy’, West European Politics, 20(1), 14-33.

Dyson, K. and Featherstone, K. (1996) ‘Italy and EMU as vincolo esterno: empowering the technocrats, transforming the state’, South European Society and Politics, 1/2, 272-99.

Dyson, K. and Featherstone, K. (1999) The Road to Maastricht: Negotiating Economic and Monetary Union, Oxford, Oxford University Press.

Featherstone, K. (2001) ‘The Political Dynamics of the Vincolo Esterno: the Emergence of EMU and the Challenge to the European Social Model’, Queen’s Papers on Europeanisation, No. 6.

Fratianni, M. (2000) ‘The international monetary system after the Euro’, in Prakash, A. and Hart, J.A. (eds.) Responding to Globalization, London and New York, Routledge, 151-170.

Giavazzi, F. and M. Pagano (1988) ‘The Advantage of Tying One’s Hands: EMS discipline and Central Bank Credibility’, European Economic Review, 24, 1055-82.

House of Commons Hansard (1990a) ‘European Council (Rome)’, HC Deb 30 October 1990 vol 178 cc869-92. http://hansard.millbanksystems.com/commons/1990/oct/30/european-council-rome

House of Commons Hansard (1990b) ‘Personal Statement’, HC Deb 13 November 1990 vol 180 cc461-5. http://hansard.millbanksystems.com/commons/1990/nov/13/personal-statement

James, B. and Friedman, A. (1998) ‘Show of Support for Rome’s EMU Bid’, New York Times, January 20, 1998.

Walsh, J.I. (1999) ‘Political bases of macroeconomic adjustment: evidence from the Italian experience’, Journal of European Public Policy, 6(1), 66-84.

(c) Copyright 2014 Bill Mitchell. All Rights Reserved.