Lira Lines Up For The Start

Time is running out. If schedules are kept, and there is no shortage of skeptics who expect they will not be, the heads of governments of European Union countries should meet in about 12 months time to decide who will and will not participate in economic and monetary union (EMU).

One of the knottiest decision is likely to concern Italy, founder member of the European Economic Community that Germany, France, the Benelux trio and Italy itself launched in the Italian capital with the Treaty of Rome in March 1057.

Forty years on, will the Italian lira make the grade? It will if Carlo Azeglio Ciampi, the former Bank of Italy governor and ex-prime minister who now heads the treasury ministry, has his way.

 

He is determined that Italy will not be snubbed when decisions are taken on the countries which will comprise the first group of EMU-ins. His EMU enthusiasm has long been evident.

Five years ago, in May 1992, when making his final address as the Bank of Italys governor, Ciampi noted: With the signing of the Maastricht Treaty on the European Union, the Community has made fundamental choices of historic importance in institutional, political and economic fields.

Less than a year later, Carlo Ciampi was sitting at the prime ministers desk guiding Italian strategy for achieving Maastricht conformity.

The European Community registers with increasing concern Italys delay in achieving the conditions for participating in monetary union. Recurring tensions in our economy are added to fundamental weaknesses that are increasingly evident, declared Ciampi in May 1992, pointing an accusing finger at inflation, exchange rate softness and cavalier

public sector finances.

His concerns were well-founded. The figures for 1991, on which his annual address was based, were daunting. Inflation was 6.7 per cent, a differential of 3.1 per cent with respect to other countries in the narrow band to other countries in the narrow band of Europes exchange rate mechanism.

The public sector borrowing requirement was L160 trillion ($ 139 million), equivalent to 11.2 per cent of gross domestic product (GDP), and total public debt was rocketing. In 1990 it equaled GDP: by the end of 1991 it had increased to L1,484 trillion and equaled 104 per cent of GDP.

A little more than a year before, at the end of 1995, inflation was pushing towards 6 per cent. Pulling out coloured graphs showing interest rates on Italys long term 10-year BTP treasury bonds, Ciampi traces the fall from almost 11 per cent at the beginning of 1995 to just over 7 per cent in March this year.

The BTP Bund spread has shrunk enormously, from four and a half percentage points to less than two.

With Italy now qualifying for MEU on the inflation and long-term interest rate criteria, Ciampi notes that Novembers return of the lira into the exchange rate mechanism puts a tick against another factor for qualification.

The hurdle that Ciampi is now trying to jump Italy over is the budget deficit.

Last years figure of 6.8 per cent, though an improvement on the early 1990s, was only marginally better than the 7.0 per cent with which 1995 was closed. When it first announced its budget proposals last summer, shortly after taking office, the Prodi government planned a gradual approach to Maastrichts 3 per cent threshold.

It was then stung by Spanish aims of immediate EMU participation into adopting greater rigour. How could a big founding member of the EEC be beaten by the Iberian newcomer? National pride was at stake.

One item that caught attention was L11.5 trillion extraordinary revenues for Europe that includes L3.5 trillion from business as advance tax on employees leaving indemnities ( a provision used as low-cost financing by firms) and L5.5 trillion of eurotax, an additional, highly progressive, one-off income tax.

With various financial items raising eyebrows, some observers reckoned the Italian budget for scraping into EMU was a bit of a fudge.

Ciampi insists, nevertheless, that the measures are all fair; figures have not been massaged. Until last year our

public accounts had their own national classification.

But since September we have been discussing the matter with Eurosiat to ensure that the criteria we use are the same as everyone else. Re-classification has given an improvement in the budget deficit of about 0.5 per cent of GDP.

While Italys budget deficit has headed downwards over the past five years, the stock of public sector debt has continued upwards, reaching L2,205 trillion at the end of last year.

Even Ciampi admits that reducing the ratio of debt to GDP, about 124 per cent at year-end 1996, will take many years.

He does not, however, see Maastrichts 60 per cent debt/GDP criterion as a reason for concern.

What counts is that the figure should be declining, that the trend should be downwards, Ciampi says.

Italian efforts to qualify for EMU participation in the first group, and the likely odds that Italy will satisfy for get close to all parameters except the debt/GDP ratio, has caught some EU members on the hop.

Until last autumn, many people had considered Italy a non-starter. Germany was certainly not expecting to have to handle the tricky issue of a results-backed Italian request for participation from the beginning. Ciampi is no fazed by such problems.

He offers a straight one-in-the-eye approach. All that we need do is give the Germans the numerical evidence, he claims, nothing that in addition

to progress on the Maastricht parameters Italy can also boast zero

external debt and Europes best foreign trade performance.

Again the sprightly 76 year-old pulls out the graphs. A pie-chart of the EUs trade surplus shows Italy alone was responsible for 18 per cent of the totaling 1995, while Germany managed 13 per cent and France only 3 per cent.

And the situation moved even more in Italys favour last year, he added. Whether the Germans will be convinced is another matter, however.

Meanwhile, as THE BANKER went to press, ciampi was considering a mini-budget with the aim of preventing this years deficit from breaching the 3 per cent level

The Bank of Italys economic bulletin published in February had suggested that measures equal to 0.8 per cent of GDP were needed. As Ciampi admits, reaching convergence objectives is hard in conditions of weak growth and high unemployment.

But these are problems for the whole of continental Europe, not just Italys says the minister five years ago,

Carli Ciampi lectured bankers and politicians gathered at the Bank of Italy

about the need for rigour, not least in launching EMU.

It is in the interests of all member countries that valuation of the level of economic convergence should be the result of a severe and comprehensive examination, he said.

Germans and others concerned about potential laxity may find that reassuring. But Ciampi was then a central banker. Now he is running with the other pack and putting his central banking experience and networking at the politicians service.

His negotiation of the liras reentry to the exchange rate mechanism was regarded as masterly.

If or when the euro happens, Italian participation will owe much to Ciampis EMU convictions: a pay-off for perseverance and a fair measure of wiles.

(The Banker)