The Italy Policy of Modernizing the Financial System

The policy of modernizing the financial system

Since the mid-eighties, also under the pressure of international integration (in particular of the European one), the modernization of the Italian financial system had begun, which had been delayed from various points of view: relative closure to international transactions; limited services offered; dominance of a banking intermediation characterized by little competition and extensive public ownership.

In the banking system, the traditional segmentation into two distinct categories of banks, one specialized in medium- and long-term credit and the other in short-term credit, was first abolished; the degree of competition increased, thanks to a series of regulatory innovations introduced by the Bank of Italy, such as the liberalization of the opening of bank branches and the possibility of setting up new banks. The l. 10 Oct 1990 no. 287, aimed at sanctioning conduct harmful to competition, entrusted the Bank of Italy with the task of protecting competition in the credit market. The transformation of the banking system was consolidated with the introduction of new unique Text (d. Legisl. 1 ° week.1993 no. 385) in credit matters. The correction of the other undesirable characteristic of Italian banks, namely their prevalent belonging to the public sphere, encountered difficulties and slowness. On the other hand, the liberalization of financial transactions with foreign countries was crowned with success. High regulatory banks had in fact prevented the outflow of Italian capital abroad from the early 1970s. Within five years, from 1986 to 1990, the block was completely dismantled. Liberalization was accompanied by innovations in the instruments and structures of the national financial market.

The legislative interventions, implemented in the early nineties to reform the stock market, were finally the first steps in the direction of greater transparency of the market and a more effective protection of minority shareholders, even if Italian business remained generally hostile and wary of a modern stock market.

Entry into the European Economic and Monetary Union and the new priorities of economic policy

According to usaers, the implementing agreements of the Maastricht Treaty established that the performance of countries wishing to be part of the European Monetary Union should be measured, and related to the parameters of eligibility, with reference to the year 1997. On the eve of that deadline the Italy it came late. In the two main budget magnitudes of public administration – the annual balance between revenue and expenditure and the consistency of accumulated debt – the results of 1996 largely exceeded the parameters: the deficit reached the 6, 5 % of GDP, against a threshold 3 ; the debt at the end of the year was 124.6 % of GDP, against a threshold of 60(a threshold which, however, can be overcome, in accordance with the Treaty, in the event of a consolidated downward trend). In comparison with other countries, Italy it was visibly detached from the core group, in the company of Greece alone. The situation looked better with regard to the other two thresholds of access to Europe, those relating broad sense to monetary stability: the average annual rates of growth of consumer prices and the yield on long-term securities were, on average in 1996, the 3,9 and 9, 4 %, respectively, against thresholds, referring to the same period, of 2, 6 and 9, 1%. As for the further criterion of eligibility for the Union, that of exchange rate stability, Italy it was able to comply with it at the last useful moment, rejoining in November 1996 the Exchange Rate Agreements of the European Monetary System (EMS), from which it had separated four years earlier.

That same year, an extraordinary effort to correct the public budget, including a one-off tax levy specifically dedicated to ‘entry into Europe’, was decided by the government and approved by Parliament. The maneuver had effects of unusual magnitude. Thanks to the sharp increase in the primary budget surplus, mentioned above, the overall deficit in relation to GDP contracted until it fell below the 3 % threshold, to 2.6 %. The ratio of public debt to GDP accelerated its decline, reaching 122.4%. The criteria established in the Maastricht Treaty were also respected with reference to the inflation rate and the long-term interest rate, whose convergence towards the lowest levels prevailing in Europe took decisive steps. The exchange rate of the lira remained essentially stable in 1997 and 1998, without the need for support from the Bank of Italy. On 2 May 1998 the European Council of Heads of State and Government decided to admit Italy among the countries that would have adopted the euro as a single currency from 1 January 1999 (see euro, in this Appendix).

The integration of the Italian economy into the European one, already advanced in the productive and commercial field, does not exhaust the tasks of economic policy. This must increasingly turn to the still unresolved structural questions. They are the general question of the modernization of the production system, with regard to: the functioning of the labor market; market and competition policies; the downsizing and reform of the public sector; to the foreign competitiveness of Italian companies. In 1998-99, a period characterized by contained GDP growth and a slight recovery in inflation, the policies implemented generally produced positive but limited results.

The Italy Policy of Modernizing the Financial System