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The end of EMU: The Prodi Interpretation

Julian D. A. Wiseman

Abstract: Romano Prodi, the President of the European Commission, gave an interview to The Spectator (a British political magazine), in which he claimed that one could join the euro temporarily, and then return to one’s old currency. This is manifest nonsense.

Publication history: only here. Usual disclaimer and copyright terms apply.

In an earlier paper (The end of EMU: legal ramifications), this author said that the irrevocability of EMU is widely misunderstood:

At the start of January 1999 eleven countries merged their currencies into the euro. This merger is described by the European authorities as ‘irrevocable’. But the nature of this irrevocability is widely misunderstood; by the public, by the press (at least in the UK), and even by some central bankers (who really should know better).

This ‘misunderstanding’ now seems to reach right to the very top.

The edition of The Spectator dated 27 May 2000 contains an interview of Romano Prodi, the President of the European Commission, by Daniel Hannan, a Conservative member of the European Parliament for South-East England. In order to make very clear that the European Commission President is not being quoted out of context, I quote from the Spectator’s article at length:

… Denmark … will vote on the euro in September [2000]. Polls suggest that the Danes are evenly balanced, and the ‘ja’ campaign is becoming noticeably edgy. Poul Nyrup Rasmussen, the pro-European Prime Minister, is so concerned that he has taken to arguing that an endorsement of the euro need only be temporary. Even if the Danes vote ‘yes’, he claims, they could always change their minds later.

Unfortunately for Mr Rasmussen, none of his continental allies is prepared to support his rather singular interpretation of the rules. On a recent visit to Copenhagen, Mr Prodi pointedly refused to accept the notion of a provisional ‘yes’, much to the embarrassment of the Danish Europhiles.

So, just to get this straight, did Mr Prodi believe that, if the Danes voted ‘yes’, they might later be allowed to change their minds?

The President hesitated, hefting his words carefully. ‘What I have said is that there is no provision in the treaty for withdrawal. This is stating the obvious. But, of course, in an extreme case, one could always forsee, for example, that Texas might leave the dollar. But this is not strictly in the US constitution.

If I had understood him, the president seemed to be saying that it would be all right for European countries to reissue their own currencies. Golly, I thought to myself. If he means what he says, he’ll be the toast of every bierkeller in Germany. I pressed him for clarification: are you really saying that existing members of the euro might choose to opt out again?

“If there were exceptional circumstances, and provided it was not done in a way which was hostile to the European Union. It is impossible to forsee for certain.”

But, in theory, a country could go back to its old money while remaining a full member of the EU?

“Certainly, it’s possible. There are countries today which are full members of the EU but are outside the euro.” There has been no provision for Greenland to leave the EU, he added helpfully, but it had still happened.

Amazing. So amazing that, for emphasis, I’ll repeat the key phrases:

Interviewer: But, in theory, a country could go back to its old money while remaining a full member of the EU?

Prodi: “Certainly, it’s possible.”

So, Mr Prodi is saying that someone foolish enough to buy 100 euros of Italian government debt, might be repaid in old Italian lira, at the official conversion rate of 1936.27-to-1. And that, by the time the bond matures, it might take more (or less) than 1936.27 lira to buy a euro. Mr Prodi is saying that the intra-eurozone exchange rate risk is non-zero, and that the relative prices of German and Italian government debt should reflect some of this exchange rate risk. Wow.

Actually, the substitution of the national currency for the euro is described by the treaties, and by European law, as ‘irrevocable’. For this author’s discussion of the legal consequences of this, and the non-recoverability of the former national currency units, see the paper cited earlier (The end of EMU: legal ramifications). Even attempting to return to the old currency units would destroy the Treaties of Rome and of Maastricht.

So, there are three possibilities:

If it’s the first of these, the President can (should? surely must?) sue for libel. But I’m guessing that he has been quoted accurately.

The second explanation, stupidity, also seems unlikely: Romano Prodi is the ex-academic who shoehorned Italy into the euro. He knows how the system works.

That leaves the third, in which lies a cautionary tale. Italy’s pensioners would benefit greatly from UK entry into the euro (for an explanation of this see my ‘Dear Aunty’ letter dated March 1997, and its postscript dated March 2000). Romano Prodi knows that if the Danes refuse to join the euro, there is no chance of persuading the British. His being ‘economical with the actualité’ is consistent with Italy’s national interest. The voters have been warned: the European authorities want the British and the Danes to join their currency, and have no compunctions about lying about the consequences.

Julian D. A. Wiseman, May 2000

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