Mr. Fazio reports on the Bank of Italy and the European System of Central
Banks Statement by the Governor of the Bank of Italy, Dott. Antonio Fazio, before the
Treasury, Budget and Planning Committee of the Chamber of Deputies, in Rome on 12/2/98.
The results the Italian economy has achieved in the past five years are attributable
to the combined operation of fiscal and monetary policy and to wage moderation.
In late 1992 and early 1993 the restrictive stance of monetary policy prevented
expectations of rising prices, fuelled by the decline in the external value of the lira and the abrupt
change in the exchange rate regime, from translating into actual inflation. A substantial
contribution to this result came from low wage growth and budgetary measures that impinged on
the structure of the main components of government spending.
Conditions in the economy became difficult again during 1994: the state sector
borrowing requirement was overshooting the targets and demand was growing rapidly, with the
result that inflationary pressures developed. In December 1994 and the first few months of 1995
domestic political factors and the repercussions of the Mexican crisis on the foreign exchange
and financial markets aggravated the situation. Official rates were raised three times: in August
1994, at the first manifestation of price tensions; in February 1995, in conjunction with
supplementary fiscal measures; and in May of the same year, when doubts arose about the
curbing of inflation.
The monetary tightening, the fiscal measures of early 1995 and the stabilization of
the exchange rate had a positive influence on inflation expectations and long-term interest rates.
Monetary policy maintained a restrictive stance throughout 1995 and in the first
half of 1996, with the aim of subduing inflation expectations and bringing the rate of increase in
prices into line with that prevailing in the other leading industrial countries.
In July 1996 a start was made on lowering the official rates. The reduction was
prudent and calibrated above all in relation to the decline in expected and actual inflation. This
approach resulted in a constant inflow of funds from abroad for purchases of government
securities; by offsetting the large outflows of Italian capital generated by the need for portfolio
diversification, these inflows contributed to the stability of the exchange rate of the lira.
The progress achieved made it possible for the lira to rejoin the exchange rate
mechanism of the EMS in November 1996.
The caution employed in relaxing monetary conditions meant that Italy's financial
and foreign exchange markets were not affected more than marginally in 1997 by the tensions
that emerged at the international level in connection with the crisis in East Asia and the
vicissitudes of some important European countries or by those attributable to domestic political
developments.
Today the Bank of Italy's reserves comprise more than 2,500 tonnes of gold and
foreign assets, net of repurchase agreements, worth 82 trillion lire, compared with ó trillion in
1992. Underlying the lira's solidity is the return to balance between Italy's external assets and
liabilities.
At the end of 1992 Italy had external claims of 600 trillion lire and external
liabilities amounting to 770 trillion. The net debt of 170 trillion was equal to 11 per cent of GDP.
Thanks to the succession of surpluses recorded on the current account of the balance of
payments, at the end of 1997 Italy's overall net external position was once more broadly in
balance.
Last September some 470 trillion lire of government foreign debt, consisting
mostly of government securities held by non-residents, were matched by net external assets of
more than 350 trillion held by the non-bank private sector, about 100 trillion held by the Bank of
Italy and smaller amounts held by banks and other financial operators.
The Bank of Italy and the European System of Central Banks
It has been agreed within the Community that the decisions concerning the start of
monetary union - in particular, those involving the countries that will adopt the single currency
from the start - will be taken in the early part of the month of May.
With the introduction of the single currency, the task of formulating monetary
policy will be transferred to the European System of Central Banks, comprising the central banks
of all the participating countries and the European Central Bank.
The Treaty establishing the European Community, as amended at Maastricht,
provides a broad outline of the internal organization of the ESCB. The preparatory work carried
out by the European Monetary Institute since the signing of the Treaty has focused on these
aspects.
The national central banks will be entrusted with the task of implementing within
each country the monetary policy decided at the Community level.
The central banks of the participating countries will continue to be responsible for
all the functions they are entrusted with under national laws; in Italy these include banking
supervision, the supervision of markets, the safeguarding of competition in the credit market and,
jointly with the European Central Bank, oversight of the payments system.
The systemic crises in foreign markets have strengthened the view that banking
supervision complements monetary policy in determining conditions of stability in financial and
credit markets.
The primary objective of the common monetary policy is price stability. The
mandate, clear and unequivocal, given to the European System of Central Banks is based on two
tenets held by the drafters of the Treaty: that the stability of the value of money is a public good
which does not hinder, but rather fosters, sustainable growth of the real economy; and that
maintaining stability depends crucially on the operation of monetary policy.
The European System of Central Banks will enjoy complete autonomy; it will
regularly provide information on its activities and report on them to the other Community
institutions. In particular, the European Central Bank will be required, pursuant to Article 109b
of the Treaty and Article 15 of the Statute of the European System of Central Banks, to publish
periodic reports on the activities of the ESCB, with a description of the current and future stance
of monetary policy. The European Parliament will be able to debate these matters and invite the
President and the other members of the Executive Board of the European Central Bank to be
heard by its competent committees.
In particular, the need for a "single" monetary policy will have to be reconciled
with the principle of "subsidiarity", which has also been embodied in the Statute of the ESCB
and is intended to permit the highest possible degree of decentralization in operational terms.
More specifically, provision is made for a division of tasks along the following
lines:
-the decision-making powers in monetary policy matters, especially with
regard to interest rates and compulsory reserves, will be centralized in the
European Central Bank. The ECB will exercise these powers through the
Governing Council, comprising the Governors of the national central
banks and the Executive Board, composed of the President, the
Vice-President and four other members. The Executive Board will be
responsible for implementing the decisions of the Governing Council on a
continuous basis;
-the operational implementation of monetary policy will be entrusted to the
national central banks.
Each national central bank will thus have two tasks: it will contribute, through its
Governor, to the decisions of the Governing Council; and it will implement these decisions in its
own country.
Operations in the money and foreign exchange markets will normally be carried
out by the national central banks.
Within this framework, the Bank of Italy will continue to carry out all the
operational functions that it currently performs. The procedures for conducting monetary control
operations will be different in part from those used today; the draft legislative decree currently
under discussion in Parliament is designed to permit the necessary changes.
Legal convergence
The Treaty requires each member state to make its national legislation, and
especially the provisions concerning its central bank, compatible with the Treaty and the Statute
of the European System of Central Banks. In particular, the Treaty requires each member state to
ensure that its central bank is independent from the government and all other political bodies; the
necessary reforms must be enacted before the introduction of the single currency.
Within the general framework laid down in the Treaty, the European Monetary
Institute and the Commission have done valuable work in analyzing and interpreting the relevant
provisions and providing clear indications of the criteria to be followed in adapting national
legislation to Community law, not least in view of the need for the latter's uniform application
throughout the European Union.
The key requirements of central bank independence with a view to a country's
adoption of the single currency are:
-the task of pursuing price stability as the primary objective;
-complete autonomy in the management of the monetary instruments,
interest rates and monetary and credit aggregates, for the purpose of
defending the internal and external value of the currency.
Some of the provisions of the draft legislative decree are aimed at strengthening
the Bank of Italy's independence, the essentials of which are in fact already provided for in
Italian legislation.
At a higher level there is the proposal of the Joint Parliamentary Committee on
constitutional reform for the Bank of Italy to be given constitutional status by affirming the
central bank's independence and autonomy in the performance of its monetary and supervisory
functions in the Constitution.
The integration of the national central banks in the European System of Central
Banks is to be achieved by linking the implementation at national level of measures concerning
official interest rates, compulsory reserves and open-market operations with the decisions
adopted by the European Central Bank.
It is important to stress that, in conformity with the Statute of the European
System of Central Banks, the participation of the Bank of Italy in the System will • not affect the
performance of the other tasks that it is assigned under national legislation, especially those
related to banking supervision.
The draft legislative decree contains the provisions needed to ensure the
compatibility of Italian legislation with the Treaty and the Statute of the European System of
Central Banks. In addition to the competent Italian Parliamentary committees, it has been
submitted, as required, to the European Monetary Institute for its opinion. The provisions
guaranteeing the integration of the Bank of Italy in the ESCB will mostly come into force at the
time the single currency is adopted.
The Statute of the Bank of Italy will be modified in accordance with the
legislative decree under discussion. The Bank's Board of Directors has already approved the
proposed amendments, which will be put to the Extraordinary General Meeting of Shareholders
to be held on 19 March: they will be rendered compatible with the final text of the legislative
decree.
The amendments to the Bank's Statutes will then follow the procedure laid down
for their approval by the President of the Republic.
* * *
In Italy the monetary policy approach that has been followed in the last few years,
and will be maintained in the coming years, is aimed at convincing market participants, workers
and businessmen that increases in income can only be achieved by expanding economic activity.
The action taken on the monetary front, of necessity extremely rigorous at times,
has made a major contribution to the convergence of Italy's economy towards those of European
countries with a more firmly established tradition of stability.
The decisions that will be taken by the European Central Bank will have
maintaining price stability as their objective.
Labour market, incomes and fiscal policies will increasingly be the only ones
available to promote the competitiveness and profitability of Italy's enterprises, and growth in
production and employment. They will have to give renewed impetus to productive investment.
The ample availability of savings, of which a large part is invested abroad at present, makes this
possible.
The revival of economic activity in Europe as a whole cannot be based on
manoeuvres to enhance competitiveness through the exchange rate of the common currency; such
action would be in conflict with the primary objective of monetary stability. This will have to be
underpinned by a strong productive system, to be achieved by curbing budgets and taxes,
boosting investment and making more flexible use of the factors of production. These are the
indispensable conditions for achieving faster growth and creating new employment.