The Italian objective : into the EMU from the start

Carlo Azeglio Ciampi*


Italy was one of the founding members of the European Community. Being a founding member of the European Community is one of the defining events in our history. Being one of the founding members of the Single European Currency is an objective which the vast majority of the Italian people strongly favours. And Italy intends to be one of the founding members of the Economic and Monetary Union, complying with the Maastricht criteria without seeking short-cuts or ways of getting around the conditions. Italy intends to enter the Union through the front door, and then to stay in.

The Italians are determined to do everything necessary to be an element of stability in the Euro system, and not an element of tension or distortion.

The Italians, whether producers or consumers, have long since embraced and cultivated a "culture of stability". After demonstrating its capacity to combine stability with development, Italy became known, throughout the Seventies and most of the Eighties, as the country of indexing, of the "scala mobile"; an inflation-prone country. A series of devaluations led to price rises which were immediately reflected in wage increases, creating a self-perpetuating spiral.

In the latter part of the Eighties, and even more so during the Nineties, this benign neglect towards inflation was reversed. Today, the vast majority of the Italians considers inflation to be an evil, and a threat to their prosperity and to their savings.

This marks a complete reversal in their thinking. With it, the institutional framework has also changed. The agreement which the Government and the social partners signed in July 1993 confirmed these changes. It did away with every form of indexation. It replaced it with a jointly agreed incomes policy linking free negotiations between social partners to the goal of stability. All of this has proven to be a powerful mean of bringing down inflation.

The agreement has already been in existence for three years. Everyone sees it as a pillar of our economy. It emerged unscathed from a very severe trial: the devaluation of the Lira in March 1995 due to factors that had nothing to do with the economy. Within a matter of weeks, the German Mark soared to 1,270 lire. With a depreciation of more than 25%, production prices rose by up to 9% and consumer prices by 6%. But the system held, and the Lira returned to its previous level within a few months.

It would have been impossible under the former indexation system. Through expectations, the effects of the depreciation on prices would have been much larger. Wages and salaries would have risen to keep pace with price increases, thus validating the depreciation. What made it possible to reverse this trend was the incomes-policy agreement, together with a tight monetary policy.

The Italian Government has set itself an ambitious objective: to take Italy into the European Monetary Union from the start. 1997 is the decisive year: for Italy and for the whole of the European Community. We have embarked on a particularly gruelling enterprise, and we are fully aware of it.

We are reassured that this is the right choice by a number of considerations:

The results in the field of public finances are not so comforting. The "stability culture" will not become fully established until the process of balancing public finances and putting them onto a sound footing has been completed. This process began in mid-1992, and has led to a halving of the Government deficit as a percentage of GDP. The 1997 Budget approved by the Italian Parliament sets out the objective to reach the 3% ratio of Government deficit to GDP, as required by the Treaty of Maastricht. The Budget contains some one-off measures, not because the Government wants to achieve 3% in 1997 and then allow the deficit to climb again, but because the convergence program previously approved by Parliament had already provided that the Government deficit should fall below 3% of GDP in 1998 and in the following years. The una tantum measures contained in the Budget for 1997 bring forward this target by one year. This does not relieve the Government from its commitment to adopt measures for the Budget of 1998 to achieve a deficit below 3%.

The composition of Italy's public deficit is often not properly analyzed. The breakdown shows that the objective of keeping the Government deficit below 3% of GDP in the coming years is not only credible, but actually easier to achieve than in 1997. If we exclude the public debt-service burden, Italy is running a substantial primary surplus, for several years now, among the highest in Europe, in fact. This means that Italians are being asked to pay more than they receive from the Government, net of interest charges. After deducting interest charges, the Italian Government surplus - the so called primary surplus - last year it was about 3,0% of GDP. It is our objective, certainly not an easy one, to raise it this year to 6,4%.

These relevant primary surpluses are more than swallowed up by the interest burden, which is particularly heavy not only because of the size of the debt, but also because of the high interest rates. This is the mill-stone hanging round the neck of the Italian economy, stifling its development possibilities. In 1995 the Italian Government paid out over 11% of GDP in debt interest. In 1996 this interest expenditure has fallen to 10.5%, and in 1997 we expect that it will further fall to about 9.5%. As we make progress towards convergence and are able to increase confidence in a sound economic policy, we expect to reduce this mill-stone to around 8% by 1998.

This means that to hold the deficit below 3% from 1998 onwards it will be enough to run a primary surplus of between 5% and 5.5%, which is one point lower than the 1997 target. 1997 will be the year in which Italians will be called on to make the greatest effort.

Lower interest rates, coupled with the parallel strengthening and stabilisation of the exchange rate, reflect the widespread conviction that Italy will be eligible to join the single currency in 1999. Above all, this reflects a solidly-based buoyant and dynamic economy.

There is much merit in the Maastricht criteria. But they also have a drawback: they distract the attention away from other elements that make up the bill of health of an economy. For example, the Treaty takes no account of the level of private savings: in Italy it is among the highest in the world, and plays a decisive role in sustaining the public debt. With their high level of savings, Italian families hold financial resources that are almost twice the size of the national debt. Furthermore, the public debt is covered entirely by borrowing in Lire. Italy has no foreign debt. This is not one of the Maastricht criteria, but it is nevertheless a significant element in establishing the solidity of an economy.

All of this must be borne in mind by those who see the participation of Italy in the EMU as a source of weakness or instability. This is a prejudice based on a situation that has long since been superseded, as many observers now admit.

It is in Europe's interest to have a strong Euro. We would seriously damage the whole of Europe if we were to create a less credible currency than the Deutsche Mark. Apart from any other consideration, it would cause an outflow of capital from the Union, which would have to be offset by raising interest rates. That would damage every country in Europe, and a fortiori Italy which would have a proportionally greater burden to bear, because of its high indebtedness. Italy is therefore wholly in favour of any measure, including the "stability pact", to guarantee a strong Euro.

Only if Europe is in a strong monetary position, and hence with falling real interest rates, can it devote its commitment to guarantee better employment opportunities, pursuing a lasting rate of growth, which will narrow the present unacceptable gap between employment and production potential, and thereby improve employment.


° °

I am playing my part in the construction of a United Europe with great commitment, urged on by my deep-seated conviction that only if we succeed in this endeavour shall we be able to hand on a better and more secure Europe to future generations.

The creation of the single currency is a fundamental step, because of its substance and its significance.

The single currency is not the final goal, but it is an economic and institutional phase in a much broader project: creating a Europe which is also politically united. Creating the Economic and Monetary Union will strengthen the European economy and provide a concrete example of that balance of powers and that solidity of relations between European countries which only an institutionally defined construction is able to guarantee.

The future prospects, and the path laid down at Maastricht, are clear in terms of their objectives and inter-relations: to create a Monetary and Economic Union based on common institutions, in which all the Member States have their own roles and responsibilities, sharing a common desire to move together into a new reality, where unity is combined with respect for and the safeguarding of the particular characters of each of its Members.

It is only an institutionally united Europe, based on sound underlying principles and structures, that can take up the world challenges that already confront it.

No European country, not even the largest and best organised, can successfully compete with the world’s main economic systems: the United States, Japan and Asia. Only a unified European market and an integrated economic system can do this.

 22-01-1997

 

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