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Graph of the Day - Did the Euro hurt Italy's "competitiveness"?
If Matteo Salvini, the right-wing Italian politician, would have its way, Italy should leave the Euro. Why? Because he thinks that the Euro is the root of Italy’s problems. He has argued that if only Italy would not have to follow EU budget rules, Italy could spend its way out of its problems and return to the growth it had before the Global Financial Crisis (GFC).
People believing that the Euro is the problem, claim that it hurts Italy’s “competitiveness”. If that is correct, Italy’s problems began sometime after she joined the Euro area. If this is correct, we should see a negative effect on Italy’s exports after the introduction of the Euro. Let’ s have a look!
Larger countries export less in shares of GDP than small countries, since the larger the country, the more industries which produce goods and services. It follows that the smaller the country, the more open is it to external trade. A country’s “openness” is usually defined as the country share of exports in its GDP, its export share. The larger that ratio, the more open is the country. And if the above is correct, the smaller is the country too.
An implication of this is that it should be possible to assess whether a country’s actual export share equals the export share it should have given the size of the country. This can be done by regressing a country’s export share on a constant and the country’s GDP. This fitted value shows the potential export share of a country given its size. Which I just mentioned above. Getting senile by the minute it seems.
Before I repeat myself more, let’s compare Italy’s actual export share to its potential export share. If the euro has indeed made Italy less “competitive”, whatever that means on a country level, Italy’s export share would begin to decline relative its potential export share sometime around the introduction of the euro.
However, already since 1980 was the Italian actual export share well below its potential export share. The euro has had nothing to do with it.
Actual and potential Italian exports.
Source: European Commission,DG ECFIN Ameco database. https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/macro-economic-database-ameco/ameco-database_en Note: Actually, potential exports were calculated by a clever Galician guy from Vigo.