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Major, Wolf and how Britain predicted Italy and Europe’s current predicament

December 5, 2011

In recent weeks Italy has superseded Greece as the Eurozone target du jour. After Silvio Berlusconi’s exit and Mario Monti’s arrival, people are wondering what will happen next to one of the EU’s biggest economies. Monti has been struggling in past weeks to convince unions to accept an addition to the 40 years of required contributions to the state welfare system before receiving pension benefits. By the same token, proposals for new taxes on the rich and a home property tax have “perplexed” Berlusconi’s conservative allies.

Up in Britain, growing sentiment against further European Union integration made it to the front page of the Washington Post today. Many Brits are silent to deepening ties to the Eurozone (so long as they are not brought to the negotiating table), as are many Danes, also members of the EU yet not in the Eurozone. According to a recent article in the Guardian newspaper, many Brits consider former Prime Minister Margaret Thatcher as the “decisive Iron Lady.”

Nicholas Watt lists the top five British leaders who kept the UK out of the Eurozone, none of them named Margaret Thatcher. In fact, Prime Minister John Major is seen as doing much more to stay out of the euro than his predecessor Thatcher, who signed the pre-EU Single Europe Act in the 1980s. Number three on the list is Martin Wolf, the lead European economist at the Financial Times. Wolf predicted the Euro Crisis in 1991 on the first day of the Maastricht Treaty negotiations (which formally created the European Union), saying that Italy, due to its poor public finances would not converge. “Either Italy manages an unprecedented budgetary transformation, or it defaults on its debts, or it will be excluded from EMU (European Monetary Union), or the criteria will be ignored.”

Due to Wolf’s guidance and key decision makers like John Major and Ed Balls, the UK retained its currency in negotiations in 1991. Major rightly predicted in a speech to the House of Commons on December 11, 1991 that, without proper convergence among European economies, “very large transfers of resources from northern states to southern states” would become inevitable due to collapses of smaller economies.

Nonetheless,  Norman Tebbit wrote in 2005, Major was just as important for the future success of Britain in his actions of 1992. From 1990 to 1992, the UK had been in the fixed-rate exchange mechanism that was originally created among European Economic Community members in 1979. Some argue that Britain could never have maintained the rate set at 2.95 Deutschmarks to the Pound, and that it was in fact forced out by currency speculators such as George Soros. Tebbit writes that Major ruined his (the Conservative) party’s reputation by not exiting more quickly from this “whole wretched experiment” of the ERM. In either argumentation, the untenable nature of the ERM was another straw that kept the UK out of the euro way back in the early 90s.

Back to this millennium: in this article from 2005, Wolf predicts about the future problems of the EU’s economy. He begins by writing, “Let us think the unthinkable: could the eurozone disintegrate? The answer is yes.” Moreover, in the chart below, he shows the steep decline in 10-year bond yields of Portugal, Ireland, Italy and Greece through 2005. It is this same group, along with Spain, that make up the acronym for troubled European economies: PIIGS. He writes of Italy, since its entry into the monetary union, saying it has done, “the precise opposite of what was needed: declining productivity performance, deteriorating competitiveness, faltering growth and weakening fiscal discipline.”

In September of this year, before Berlusconi’s exit, Martin Wolf spoke with Yahoo Finance about the Eurozone crisis. He says how a recent visit to Rome modified his view about the potential loss of Italy and Spain, who are both too big to fail (for the sake of the Eurozone) and too big to rescue (in terms of what funds countries would be willing to contribute to bail them out). He was moved by speaking with an Italian politician, who told him, “It would be better to leave (the Euro) than to endure 30-years of pain.”

Wolf speaks not only to Italy, but to the Eurozone’s problems in general in this November roundtable discussion with Fareed Zakaria on CNN.

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