Italian budget pulls out all the stops

Date: 17/10/1996

By Ivo Ilic Gabara

THE Finnish markka was always expected to win the race for the Exchange Rate Mechanism finishing line, with the Italian lira trailing in its wake.

But given the surprisingly high ambitions of the outline budget recently unveiled by Rome, financial market experts believe the lira will not be far behind - despite French President Jacques Chirac's recent mutterings casting doubt on its readiness.

Most analysts believe that the EU's powerful monetary committee is keen to wait until the Italian budget has been approved by its parliament, so that entry into the European currency grid is recognised as a reward for good behaviour.

Italy's Treasury Minister, Carlo Azeglio Ciampi confirmed this week that negotiations on the conditions for Italy's re-entry into the ERM were under way, saying that the lira would rejoin the grid “at a realistic rate and at the most appropriate moment”.

“The most appropriate moment”, according to those who share German Finance Minister Theo Waigel's view that ERM entry two years before the creation of a single currency bloc is a necessary pre-condition for EMU membership, will have to be before the end of this year.

That could cause problems for Rome, given that the budget's safe passage through the Italian parliament before the end of the year is far from assured.

However, most other member states are likely to go along with a less legalistic view of the criteria, suggesting currency stability is enough to win a place in the euro-sun - as Sweden did this week in explaining its decision to stay out of the grid for the time being.

As for the “realistic rate”, Ciampi must tread carefully between the opposing interests of Italian exporters and the country's EU trading partners, in particular Germany, France, Austria and Belgium.

Experts predict that the parity level is likely to be set somewhere between 1,000 and 1,100 lira to the deutschemark, once the 1997 budget has been approved.

Although many aspects of the budget have still to be fine-tuned, its overall shape is now public. Italians will have to come up with 33 billion ecu in order to comply with the Maastricht convergence criteria by the end of 1997.

It is a price that most Italians seem prepared to pay. According to a recent poll commissioned by La Repubblica, 74.2&percent; of the population agree that everyone should accept sacrifices proportional to their income to reach the goal of EMU.

More precisely, 63&percent; of them are willing to give 1&percent; of their income to help the government meet the criteria and 82.2&percent; are convinced that Italy should not miss the 1 January 1999 start date for EMU.

Since coming to power, Premier Romano Prodi's govern-ment has made it clear that it firmly intends to “take Italy into Europe” - but it is only now becoming clear how it proposes to do this.

As recently as July, the government formally announced a budget which would have left the country one year behind the schedule agreed in Maastricht.

Two things have happened since then to cause the prime minister to change tack.

First, during a recent meeting with Spanish Prime Minister José María Aznar in Valencia, Prodi realised that with Madrid intent on pursuing the strict Maastricht criteria, he could not count on Spain as an ally in requesting a 'flexible' interpretation.

Secondly, the far-left party of Communist Refoundation, which many feared would hold the government hostage over the budget, has proved to be much more open to negotiation than anyone expected.

In exchange for safeguarding social welfare spending, the party gave Prodi carte blanche to introduce a stringent budget riddled with new taxes, such as a special 'Eurotax'.

However, no degree of last-minute Euro-enthusiasm will be enough to secure Italy's right to join the EMU club.

No matter how much he squeezes from his citizens, Prodi needs to win the confidence of the financial markets to make his budget work the EMU miracle.

To ensure early single currency membership, the budget needs to be accompanied by a quick fall in interest rates and exceptionally strong economic growth. Neither of these is certain nor can be easily influenced by the government. On the contrary, by applying excessive fiscal pressure, Prodi risks slowing down the economy.