June 21st, 2012
07:43 PM GMT
London (CNN) – Controversial and caddish to some, funny and forthright to others, former Italian Prime Minister Silvio Berlusconi is arguably the most high profile scalp claimed by the eurozone crisis so far.
Whether it was the ‘Bunga Bunga’ scandal or the unbalanced budgets that booted the former cruise-ship crooner out of office remains a point of discussion.
One thing you can’t argue with however is that eurozone membership has robbed Italy of its traditional tool for tackling boom and bust cycles: The currency devaluation.
Cue Berlusconi, who Italians often call "Il Cavaliere." “Leaving the euro is not blasphemy…” writes the 75-year old on his Facebook page.
"What would happen if Italy, Spain or Greece went back to their old currencies? I don't know, maybe there would be a loss of wealth but I don't understand why," Berlusconi later told Italian news agencies.
“Berlusconi outburst confirms what I wrote in my last paper,” tweets Roubini, the New York University Stern Professor and Chairman of Roubini Global Economics, a research firm.
“Powerful business/political lobbies in Italy (are in) favor of a Euro exit,” the tweet continued.
Roubini points out that three of Italy’s political parties are now anti-euro.
Berlusconi may be known for his flippant outbursts but behind his court-jester comments lie a painful truth: with their endless tinkering proving ineffectual, the eurozone may be leaving itself with little option but to slash the value of the common currency - or else face outright defections from peripheral members.
Although close to a two-year low already many economists contend that the euro’s current exchange rate is harming the bloc’s weaker members and straining the political goodwill that underpins the money itself.
You see, the euro can’t be everything to everyone and although it is supposed to be Europe’s "common" currency not all of the 17 member states share the benefits it is supposed to bring.
Stephen Pope, managing director of Spotlight Ideas, is among a growing number of analysts calling for a considered devaluation of the euro.
"The reality of the polarized eurozone economy is now at such a state that the FX rate of the euro suits Germany but does not suit many others,” he says.
“As it stands, the eurozone is in essence a convoy and it can only move at the speed of the slowest ships.
“To remedy that, either a decision is taken to effectively revalue the euro in a course of action by the European Central Bank or we speed up the convoy by sinking, or more kindly, casting off the slow speed ships.’’
In the 50 years before eurozone accession some European countries had developed a habit of adjusting their money to fix economic imbalances.
One of the most prominent devaluers was the Italian Republic where the ongoing depreciation of the currency made most Italians "Lira millionaires."
It’s true that repeated devaluations may have spurred inflation in the short term but they also made the country’s goods more competitive on the global scale, creating jobs and prosperity.
And the absence of their normal safety valve seems to have some of Italy's political stalwarts baffled.
“The eurozone sovereign debt crisis has already turned into a currency crisis,’’ says Nicholas Spiro, head of Sovereign Strategy, a London-based consultancy which assesses countries’ credit risk. “The future of the euro itself hinges on what happens in Spain and Italy.”
Nations like Italy were known for slicing maybe 7% or 8% off their exchange rates a year but credit strategists like Cairn Capital’s Graham Neilson say a concerted action to weaken the euro would have to be in the double digits - “25,30 maybe even 40%” - before it made a difference.
That may be the theory but orchestrating such action would be tricky, largely because talk of a weaker euro is still taboo in Brussels.
What's more the ECB kept interest rates unchanged at its last meeting and some think tanks don't reckon it will cut the cost of borrowing money until the second half of the year.
“I find it hard to believe the ECB or the Germans would ever actually sanction a revaluation of the euro against the key currency peers,” says Pope.
“It would be an admission that ‘Project Euro’ had failed.”
The irony is though: If they don’t weaken the euro eventually, EU leaders may not have a common currency left to defend.
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