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

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