Italy's Lira Shift Seen as Move Toward European Unity
LAST November, the Belgian Government minted five tons of gold coins in a publicity stunt to promote the idea of a single European currency. That elusive goal was brought a step forward earlier this month when the Italian government, after 10 years of being an outsider, brought the lira in line with the currencies of most of the other 11 members of the European Community (EC). Italy retreated from the luxurious 6 percent leeway it has had in determining the lira's value against its neighbors' currencies, and brought it down to the 2.25 percent band accepted by much of Europe.
To play it safe against exchange rate pressures, Italy also devalued the lira by 3.86 percent against the Deutschemark. This should also boost Italy's exports.
Italy's bold move indicates the complex web of influences confronting the European countries as they progress toward economic unity. Minister Guilio Andreotti now must contend with a host of forces: the strength of the all-important West German mark, political infighting among Italian parties in the run-up to elections this spring, and a fast-growing budget deficit.
But rising above the nitty-gritty details of economic policy is the increasing importance of joining the ``group'' of European nations.
``It's a necessary commitment from Italy and will be welcomed by other members. They [the Italians] are committing themselves to concurring with the decrees of the EC. They are saying the same rules apply to all member states,'' commented Christopher Tinker, an economist with UBS/Phillips & Drew in London.
The European Monetary System (EMS) was created in 1979 to stabilize the trading environment in Europe. Currencies prone to rapid swings in value hurt the smooth flow of trade. The key to the system is the European Currency Unit (ECU), a basket of currencies that functions as an accounting measure between European central banks. (The Belgian gold ECU, however, for now is just a coin for collectors.)
Under the Exchange Rate Mechanism, the EC went a step further by asking countries to keep their currencies within a fixed percentage - 2.25 percent plus or minus - of the ECU parity rate. Spain agreed to 6 percent and Britain, Greece, and Portugal did not join.
Now Italy has said it is willing to sacrifice some economic freedom for the stability required of a full member of the EMS. The Italians also are trying to put their financial house in order before July, when controls are removed on capital flows between EC members.
By moving from 6 percent to 2.25 percent, Italy holds less sway over its own economy. ``The reduced flexibility in the exchange rate can only be matched by greater elasticity in the interest rate,'' Guido Carli, Italian Treasury Minister, was quoted as saying.
Italy has a budget deficit of 1 trillion lira ($79.3 billion), inflation over 6 percent, and a current acount deficit (the amount that imports of goods and services exceed exports, plus the balance in investment income) of $10.5 billion in 1989, twice the $5.2 billion in 1988.
Some analysts think Italy made a grave error by caving in to EC pressure on the exchange rate before taming inflation. ``There's a lot of political and wishful thinking in bringing in the narrow band. I see it very much as an act of bravado to increase status versus other countries in the EC,'' said Brendan Brown, chief of research at Mitsubishi Finance International in London.
In this pessimistic view, Andreotti will fail to convince unions to reign in wage demands, bow to pressure by local politicians to keep public expenditures high, and thus be forced to raise interest rates to slow inflation. This will suck in foreign funds and worsen inflation.
``It's a bit of a tightrope for them to have to convince unions inflation won't creep up so they can keep wage settlements down,'' said Sheldon Warton-Woods, senior economist in the European section of Lloyds Bank.
The stability of the EMS relies heavily on the linchpin currency of Europe - the mark. With Germany poised to take advantage of the expected economic boom in Eastern Europe, eager foreign investors have helped drive the mark up by more than 10 percent since November. That ripples through the EMS chain. Soon the entire group of currencies in the mechanism may have to be realigned for the first time in several years.