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Will Italy Join Euro Club? Germany Casts Doubt

Rome and Bonn are in a war of words over whether Italy will qualify to join the single European currency in 1999.

The Germans apparently think it won't.

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At the World Economic Forum in Davos, Switzerland, last week, Horst Siebert, an economic adviser to German Chancellor Helmut Kohl, said it would be better for southern European countries, such as Italy, to remain outside the new currency for the moment, in the name of economic stability.

"I must say I don't find it surprising," says Sergio Romano, a leading commentator and ex-Italian ambassador to the former Soviet Union. "These are things that have been said by other Germans at other times."

Nevertheless, the Italians protested. Prime Minister Romano Prodi assured the Germans that he is dedicated to bringing Italy into the new economic union on schedule. He has said he will resign if Italy fails to meet the strict fiscal criteria for monetary union contained in Maastricht Treaty. The terms of the treaty were agreed upon in 1991 and ratified by member states in 1993.

In response to the uproar in Italy, German Finance Minister Theo Waigel then commented that all countries that met the criteria were eligible to enter. But various German bankers have subsequently expressed a divergent view: Italy is not ready for the euro, as the new currency will be known. One of them even called Italian participation in the euro "a time bomb."

Meanwhile, the Independent newspaper in London reported Feb. 3 that there was a secret agreement between Germany and France to create a Stability Council to control monetary, fiscal, and employment policy and that its members would include only those nations who join the euro on schedule.

Neither France nor Germany has yet denied the story.

Despite Mr. Prodi's confidence that Italy can join the monetary union on schedule, most observers think Italy will have to wait until after 1999, when the monetary union is set to begin.

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Italian Treasury Minister Carlo Azeglio Ciampi, responding to the prospect of a possible stability council, told the German weekly Der Spiegel that he was concerned that "some economies," which he did not name, would dominate the new Europe. Prime Minister Prodi will have a further opportunity to clarify the German position when he meets with Mr. Kohl and other German leaders in Bonn Feb. 7.

To a large extent, Italians say, the hubbub over Italian participation is dictated by the fact that Kohl is up for election and is dropping in the opinion polls, as average Germans worry about what will happen to their life savings if they must to give up their mighty German marks. Germans "can't help but be worried," says Mr. Romano, "because this is a gamble. Nobody can be sure the euro is going to work."

But unfortunately for the Italians, there is also some truth in what the Germans are saying. "Italy has a political system that is not in tune with Europe, it's as simple as that," says Romano. In Italy, he says, each government remains hostage to small coalition partners, which have a veto power out of proportion to their size.

There is also a gulf between the two nations' political and economic stability. Kohl has led Germany for 14 years. In the same period, a new Italian government has come into office more or less every year.

On the economic front, the Italian lira's exchange rate has been very volatile over the past four years. The German mark, on the other hand, is one of Europe's most reliable and strongest currencies.

There is broad agreement that achieving the Maastricht criteria by 1999 will not be easy for Italy. "And assuming we reach these levels, we will reach them at the last minute," says Mario Baldassarri, a leading Italian economist. This, he says, is what worries the Germans.

The time remaining to get Italy's economic house in order is extremely short, says Mr. Baldassarri. In his opinion, the window of opportunity for taking serious action will close at the end of March. To meet the criteria, he says, Italy needs to act on privatizing its massive state holdings, reforming its generous pension system, cutting back on public health spending, and slashing expenditures for its bloated civil service.

Baldassarri is doubtful that Prodi, whose Olive Tree coalition has a slim majority in Parliament, can convince his partners of the urgency of reform. But he is also convinced that joining the monetary union on schedule is crucial for Italy. "It means buying back that credibility that Italy has frittered away over the last 30 years," he says.

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