Lessons for the euro from Italian and German monetary unification in the nineteenth century

by Roger Vicquéry (London School of Economics)

Special euro-coin issued in 2012 to celebrate the 150th anniversary of the monetary unification of Italy. From Numismatica Pacchiega, available at <https://www.numismaticapacchiega.it/5-euro-annivesario-unificazione/&gt;

Is the euro area sustainable in its current membership form? My research provides new lessons from past examples of monetary integration, looking at the monetary unification of Italy and Germany in the second half of the nineteenth century.


Currency areas’ optimal membership has recently been at the forefront of the policy debate, as the original choice of letting peripheral countries join the euro was widely blamed for the common currency existential crisis. Academic work on ‘optimum currency areas’ (OCA) traditionally warned against the risk of adopting a ‘one size fits all’ monetary policy for regions with differing business cycles.

Krugman (1993) even argued that monetary unification in itself might increase its own costs over time, as regions are encouraged to specialise and thus become more different to one another. But those concerns were dismissed by Frankel and Rose’s (1998) influential ‘OCA endogeneity’ theory: once regions with ex-ante diverging paths join a common currency, they will see their business cycle synchronise progressively ex-post.

My findings question the consensus view in favour of ‘OCA endogeneity’ and raise the issue of the adverse effects of monetary integration on regional inequality. I argue that the Italian monetary unification played a role in the emergence of the regional divide between Italy’s Northern and Southern regions by the turn of the twentieth century.

I find that pre-unification Italian regions experienced largely asymmetric shocks, pointing to high economic costs stemming from the 1862 Italian monetary unification. While money markets in Northern Italy were synchronised with the core of the European monetary system, Southern Italian regions tended to move together with the European periphery.

The Italian unification is an exception in this respect, as I show that other major monetary arrangements in this period, particularly the German monetary union but also the Latin Monetary Convention and the Gold Standard, occurred among regions experiencing high shock synchronisation.

Contrary to what ‘OCA endogeneity’ would imply, shock asymmetry among Italian regions actually increased following monetary unification. I estimate that pairs of Italian provinces that came to be integrated following unification became, over four decades, up to 15% more dissimilar to one another in their economic structure compared to pairs of provinces that already belonged to the same monetary union. This means that, in line with Krugman’s pessimistic take on currency areas, economic integration in itself increased the likelihood of asymmetric shocks.

In this respect, the global grain crisis of the 1880s, disproportionally affecting the agricultural South while Italy pursued a restrictive monetary policy, might have laid the foundations for the Italian ‘Southern Question’. As pointed out by Krugman, asymmetric shocks in a currency area with low transaction costs can lead to permanent loss in regional income, as prices are unable to adjust fast enough to prevent factors of production to permanently leave the affected region.

The policy implications of this research are twofold.

First, the results caution against the prevalent view that cyclical symmetry within a currency area is bound to improve by itself over time. In particular, the role of specialisation and factor mobility in driving cyclical divergence needs to be reassessed. As the euro area moves towards more integration, additional specialisation of its regions could further magnify – by increasing the likelihood of asymmetric shocks – the challenges posed by the ‘one size fits all’ policy of the European Central Bank on the periphery.

Second, the Italian experience of monetary unification underlines how the sustainability of currency areas is chiefly related to political will rather than economic costs. Despite the fact that the Italian monetary union has been sub-optimal from the start and to a large extent remained so, it has managed to survive unscathed for the last century and a half. While the OCA framework is a good predictor of currency areas’ membership and economic performance, their sustainability is likely to be a matter of political integration.

Democracy and taxation in Greece: a long history of rural favouritism

by Pantelis Kammas (University of Ioannina) and Vassilis Sarantides (University of Sheffield)


Some of the basic characteristics of the current tax system in Greece seem to have deep historical roots. One is the amazingly low tax burden that has fallen on the incomes of the agricultural population throughout the history of the Greek state.

This is because governing authorities always keep an eye on the welfare of the politically powerful group of peasants and farmers to gain support. Another deep-rooted characteristic is significant reliance on indirect versus direct taxes, which can be attributed to analogous political economy reasons.

The main concern of the governing authorities in the agrarian new-born Greek state of the nineteenth century was the legitimisation of their authority. On this basis, a number of economic benefits through tax (and other) policies were provided to the rural population that became politically powerful after 1864, the date that voting rights were granted to all adult males.

In that way, authorities aimed to ensure a minimum level of social consensus and to convince the citizens of the young Greek state that the public demands of the war of Independence – ‘social justice’, ‘democracy’ and ‘equality of political rights’ – would be satisfied.

This research highlights the importance of economic development in the relationship between democracy and taxation, focusing mainly in the case of Greece during the nineteenth and early twentieth century. Notably, Greece established universal male suffrage in 1864 while it was still a developing, pure agrarian economy with 76% of the population in the agricultural sector.

In contrast with Greece, other democratic European countries had significantly narrower agricultural sectors in the nineteenth century – the majority of them at a level below 40% of the total working population.

Building on a unique tax dataset that contains 13 different tax categories of the newborn Greek state during the period 1833-1933, the results conclude that the extension of the voting franchise in 1864 did not affect the size of the government – but it did change the structure of taxation in favour of the rural population.

Universal male suffrage was accompanied by a long-run reduction in the percentage of rural (for example, taxes on land) to total taxes by 8.25%. This reduction was balanced by increases in indirect taxes – mostly custom and excises duties – leaving the overall level of taxation constant over time.

The research interprets these empirical findings in terms of a political economy motivation. In particular, the Greek governments changed the composition of taxation, reducing rural taxes to satisfy the large majority of the electorate who were poor peasants and farmers.

In turn, the findings for Greece are compared with that for a sample of 12 West European countries that were substantially more developed on democratisation.

The analysis suggests that in more industrialised European economies, democratisation revealed the political preferences of a more urbanised electorate – mostly consisting of workers and middle class capitalists – leading to a different pattern of ‘reshapement’ of the tax system.

This is consistent with the theoretical priors that the level of development, and the consequent structure of the economy, will result in a differentiated effect of democratisation on fiscal policy.