The Lira Wins Again

Italy's economy is like its wines--robust, zestful, unpredictable. Two years ago the lira was among the strongest currencies of Europe. Last winter the currency seemed headed toward devaluation. Now, in a remarkable turnaround, the lira has recovered, and a measure of business confidence is returning to Italy.

The lira's volatility reflects a particularly Italian combination of economic assets and liabilities. The nation's real rate of growth--5.5% in 1970--is among the highest in the Western world. Italy's hoard of gold and net foreign reserves is Europe's second largest, after Germany's. Yet a primitive and easily manipulated stock exchange, an outmoded bureaucracy, and unenforceable tax laws encourage Italians to invest their money abroad. Even before last winter's series of strikes and government crises, Italians reverted en masse to their old habit of carting lire across the border by the suitcaseful.

Administrative Ploy. Devaluation was prevented by Guido Carli, governor of the Bank of Italy, who made three shrewd moves. First, he raised the interest rates on Italian bonds to make them as attractive to lire investors as foreign issues had been. Next, through a neat administrative ploy, Carli made currency speculating less profitable. Foreign banks had been required only to report their lire intake by phone to their nearest correspondent bank in Italy to receive full credit in any currency. Carli decreed that banks abroad would have to send the lira bills to Rome before they could get foreign funds. That caused a costly delay for the money-changers, who responded by discounting lire by as much as 10%.

Carli's third move was stunningly simple. He bolstered his country's balance of payments by replacing Italy's depleted store of monetary reserves with dollars borrowed by state-run and private corporations from private banks in Europe--a step that no one had thought of taking before. Other countries with basically sound currencies can well adopt the same technique when they are faced with temporary capital outflows. Because the government guaranteed repayment of the loans and the country was considered a good risk, Italian firms got a plentiful supply of money at favorable rates. Carli arranged for Italian corporations to borrow $1.24 billion in Eurodollars at rates only .75% higher than those European banks charge each other.

Buying Time. The whole operation was immeasurably helped by Carli's high personal standing among international bankers. An athletic, ascetic-looking man, he holds a position comparable to the combined posts of Federal Reserve Chairman Arthur Burns and Chief Presidential Economist Paul McCracken. Carli sits in on Cabinet financial discussions and closely controls the banking system, a job made easier because Italy's four largest banks and two largest investment firms are state-owned. Over the past decade, he has survived twelve governments, and has been a key figure in working out the two-tier market for gold and the Special Drawing Rights in the International Monetary Fund.

Carli's rescue of the lira has bought time for more fundamental reforms. The Italian Parliament last month approved a package of financial measures, including new incentives for capital investment and taxes on consumer goods that would help check inflation and finance public health and housing programs. The government also has in the works a program of tax reform that would eliminate overlapping taxes, and a law that would allow domestic mutual funds to open in Italy, thus providing a local outlet for investors.

Italy has pushed its modernization none too soon. The country's trade unions recently called a half-day general strike, and two weeks ago electrical workers caused a four-hour brownout in Rome. The unions threaten more strikes unless the government rapidly improves housing and schools. Labor trouble in the months ahead could slow production and start still another capital flight. But if Prime Minister Emilio Colombo can keep the country tranquil by rapidly streamlining the economy, 1971 may be a vintage year for Italian business. The European Common Market Executive Commission predicts that, barring domestic discord, Italy will have the highest growth rate of any of the six market nations in 1971.

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