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.

Myth, history and counter-history of the creation of an Italian national market

by Maria Stella Chiaruttini (European University Institute)


The ducat was the main currency of the Kingdom of the Two Sicilies between 1816 and 1860

Risorgimento history and mythology have, from the very beginning, been a cornerstone of Italian nation building and are still informing public rhetoric and education. However, while their predominance in public discourse has decreased over the last few decades, stereotypical views of Italian unification have begun to be increasingly and vociferously called into question, especially in the South, by cultural associations and popular history writers. Opposing the nineteenth-century interpretation of the messianic role played by Piedmontese patriots and institutions in unifying the country, they highlight the shortcomings of Italian unification, advocating a ‘counter-history’ of the Risorgimento in which the South is portrayed as the hapless victim of ruthless colonizers.

This picture is most provocatively put forward in L’invenzione del Mezzogiorno by the journalist and political activist Nicola Zitara (Jaca Book, 2011). The book, based on secondary literature and addressing a non-academic audience in an extremely polemical style, traces back the origins of the North-South divide to the pillage of the South by a gang of Northern robber bankers. Though lacking in scientific rigor and fairness, it has the merit of addressing one of the – surprisingly – least studied aspects of the Italian ‘Southern question’, namely the financial one. It is indeed high time to open a historical debate on the financial divide still characteristic of today’s Italy. Even more importantly, the financial history of the Risorgimento can offer new insights into two major contemporary issues: economic regionalism, recently come to the forefront with Brexit and the Catalan crisis, and the nexus between finance and politics that emerges constantly in the ongoing EU crisis.

As part of a larger project on Italian financial integration during the Risorgimento, this research focusses on the early development of modern financial markets in the Kingdom of Sardinia and the Two Sicilies and their clash in the first years after Unification. On the basis of extensive archival research, it questions both the traditional view of Southern backwardness versus Northern progress and the revisionist stance praising the superiority of the old Southern system. Apart from the huge differences between the financial systems of the former Italian states, which make the very concept of a financial ‘North’ meaningless, this study shows the crucial role that political events played in shaping financial markets in the Two Sicilies and Piedmont-Sardinia, determining comparative advantages and disadvantages that would prove crucial after 1861.

Interestingly, both kingdoms faced sovereign default, although at different stages. The Two Sicilies came close to bankruptcy in the early nineteenth century, when public debt, already high due to the Napoleonic wars and the expensive restoration of the Bourbon dynasty, skyrocketed after the 1820 constitutional uprisings were crushed by a long and costly Austrian military occupation. From then on, the constant concern of the Bourbons was the repayment of foreign debt. To this end, they consistently implemented an austerity policy which, coupled with the political and financial troubles of 1848, delayed any major banking reforms for decades. At the same time, however, the Southern public national bank, the Bank of the Two Sicilies, managed a sophisticated cashless payment system countrywide that, although working less smoothly than is usually assumed, helped to finance public debt while ensuring monetary stability. Moreover, the role played by Southern business elites in consolidating a model of financial development which favoured Naples at the expense of the rest of the country should not be overlooked.

The rather primitive financial system of the Kingdom of Sardinia was, on the contrary, completely overhauled in less than one decade to sustain the war effort during the disastrous First War of Independence (1848–49), pay for war reparations and enable Prime Minister Cavour to pursue his expansionary policies. From 1848 on, the Piedmontese government found its closest ally in an initially modest bank of issue, the Bank of Genoa, later National Bank and forerunner of the Bank of Italy. Under Cavour’s leadership and with the support of a dynamic business elite, a complex credit system closely integrated with the international markets emerged – a system, however, plagued by large-scale speculation and dependent on both government support and foreign patronage.

The first few years after Unification were particularly traumatic for the South, although not unequivocally negative from the point of view of financial development. The region suffered heavily from monetary and credit disruptions due to warfare, the ever-increasing burden of Italian public debt with its corollary of note inconvertibility, and the decrease of its political and economic power within the new state. The expansion of the Piedmontese National Bank dealt a fatal blow to the Bank of Naples, as the Bourbons’ bank was renamed. At the same time, however, it encouraged the latter to update its business model and the provinces benefited from the creation of a branch network first by the National Bank and later by the Bank of Naples. However, banking competition also came at the cost of financial instability, since, due to bitter regional antagonism, Italy constantly swung between banking pluralism and de facto note monopoly until the early twentieth century. By analysing the feud between the National Bank and the Bank of Naples, this study also shows how the ‘constructed identity’ of the two banks was instrumental to the private interests of their respective business groups, giving rise to conflicting narratives still in currency today.