A statue of a recumbent James Joyce faces the triumphal arch in Pula in Croatia, known as the Arch of Sergii. Joyce, 23, spent her first six months in exile here. When a teaching job at the Berlitz in Trieste didn’t materialize, he headed south to Pula with pregnant Nora. Young Joyce wrote fondly of the cafes here, such as the one beneath the school he taught at, where his laid-back effigy sits gazing up at the Roman arch. Up the road is one of the best preserved Roman amphitheaters in the world.
Earlier in the week, up-and-coming Irish band Inhaler supported world conquerors Arctic Monkeys, once again highlighting why Croatia is such a vibrant summer destination. Where else would you find this – Roman ruins serving as the backdrop for a contemporary concert?
Rome was unusual economically in that the city itself produced next to nothing, could not feed itself, and operated on a credit system that would not seem alien to us today
It’s easy to forget that the Roman Empire flourished all around the western Adriatic in what is now Croatia. Indeed, Roman and later Italian heritage is captured in the fact that this part of northern Croatia is officially bilingual: Croatian and Italian. The inscription on the Arch of Sergii reads “SALVIA POSTUMA SERGI DE SUA PECUNIA” which means that this ark was paid for by Salvia, wife of Sergii, with her own money. This detail about who paid highlights the importance of money in the Roman Empire.
Rome was unusual economically in that the city itself produced next to nothing, could not feed itself, and operated on a credit system that would not seem alien to us today. At the center of the credit system was a monetary union that linked this vast empire, with Roman territories from western Syria to southern Scotland using the same currency. Like today’s EU, where the euro is a key political and monetary instrument, Roman denarii gelled the empire, as traders in Antioch, miners in Spain and soldiers on the German border in Aachen in the Rhineland used the same currencies, with the same interest rate, the same banking rules and ultimately belonged to the same globalized Roman economy.
Later this year, Croatia will join the euro. It is one more step in the journey which has seen the country move away from the historical Yugoslav/Balkan orbit and back towards Central Europe. While the politics and geopolitics of this movement are understandable, the macroeconomics is a bit more complicated. The similarities and contrasts between Croatia and Ireland are fascinating – and consequential. Simply put, the Irish economy has boomed over the last five years on almost every metric, which means our exchange rate is undervalued. Such an economy normally requires the exchange rate to rise to remove heat. When that’s not possible, we get asset price spikes, price hikes, full employment, buckets of tax revenue, immigration, and an economy where supply struggles to keep up with demand.
Despite a strong post-pandemic recovery, the Croatian economy has stagnated at best, implying, among other things, that the exchange rate is overvalued. Such an economy must grow, which requires a much weaker exchange rate to stimulate growth, investment and employment. An overvalued exchange rate hampers growth, the elixir of all social progress. “Locking in” an overvalued exchange rate by joining the Euro at a higher level than is reasonable for the weak local economy implies continued stagnant growth, little or no investment, levels of unemployment and unemployment. emigration, and ultimately lower incomes.
The latest data shows that Croatia has a constant budget deficit, a large and growing trade deficit, a current account deficit and a rising national debt-to-income ratio. At the same time, the emigration of young Croats is a permanent topic of conversation. For example, published figures for 2021 show that Ireland issued 32,000 PPS numbers to Croats. As the adoption of the euro approaches, many locals and even more tourists are complaining that the country is becoming extremely expensive.
People forget that Ireland devalued its currency six times against Germany from 1980 to 1993 in order to get in shape.
Obviously, inflation is a key topic; however, a country that is most dependent on tourism in the EU must offer value, and an overvalued exchange rate prevents it. Furthermore, tourism is labor intensive and offers little opportunity for productivity growth. On the whole, countries do not get rich through tourism, but they become seasonal.
It is not clear that this type of economy should have the same exchange rate as Germany, or Ireland for that matter. People forget that Ireland devalued its currency six times against Germany from 1980 to 1993 in order to shape itself for further growth from the 1990s to today. Part but not all of the story was these devaluations, allowing the industry to be competitive, at least initially.
Devaluations mean lower incomes relative to foreigners, but this price change allows a country to earn a higher standard of living over time, precisely what Ireland has done. Obviously there were a lot of other things going on in the background, but the key price of any country is the exchange rate: if you get it wrong, the economy will have to work a lot harder to achieve higher incomes . An economy that borrows all the time, with an exchange rate tied to much stronger economies, is renting its standard of living instead of earning it.
Now look at Ireland. In an ideal world, as property prices continue to rise and investment flows in, leading to local overheating, the Central Bank would allow the exchange rate to rise, which would put the brakes on things. National interest rates would also rise as national inflation outpaces wages. Higher interest rates blow through the housing market, driving down prices while the higher exchange rate moderates the flow of investment as the country becomes more expensive. All of this allows the economy to adjust more quickly and easily to the gap between booming demand and rigid supply.
We should have much higher interest rates and much stronger exchange rates but because we are in the euro our interest rates and exchange rates are a mix of terms across Europe , combining strong and weak outliers. The implication for Ireland is more money cascading into the economy, more opportunities, more immigration, higher wages and prices and higher house prices. We are overheating. Economists call this the “real economy”, as opposed to the adjustment of the monetary economy.
By contrast, a country like Croatia – and before it Greece and forever Italy – suffers from weaker growth, higher debt levels and periodic bond crises as investors wonder if they can continue to pay their debts with lower incomes. The European Central Bank might discuss ways to militate against bond crises, but the underlying economic dilemmas aren’t evaporating, they’re getting worse.
Interestingly, the monetary history of the Roman Empire was characterized by repetitive credit crises, one of the most debilitating occurring in AD 34 about a year after the crucifixion of Jesus Christ and about 40 years after the construction of the arch of Pula. One wonders if the wealth of old Salvia survived this crisis? Economic history has a habit of reminding us of how the world works. Are we paying attention?