EU Ministers Accept Italy’s Lira Into ERM

The Italian lira was accepted back in the European exchange-rate mechanism Sunday after a four-year absence, raising Italy’s chances of joining the first wave of countries to adopt the future European currency.

“We have taken back our place in Europe,” said Italian Industry Minister Pierluigi Bersani.

Officials from other European countries hailed the move. Dutch central bank President Wim Duisenberg said it is a sign of confidence in recent Italian policies.

Steady improvements in the Italian economy made the reentry possible, but the terms makes “this a bit of a defeat for the government because it shows that Italy’s willingness to meet the European monetary union targets has weakened its negotiating position,” said Francesco Giordano, head of research at San Paolo International, an Italian investment firm. “Exporters are not going to be happy by any means. Already they have seen their foreign orders fall significantly.”

The lira joins the Austrian schilling, the Belgian franc, the Danish krone, the Dutch guilder, the Finnish markka, the French franc, the German mark, the Irish punt, the Portuguese escudo and the Spanish peseta in the ERM. Only Britain, Sweden and Greece remain outside the grid, which was created as an initial step to coordinate currencies before a formal European currency was introduced.

The decision to readmit the lira came in an extraordinary 8 1/2-hour Sunday meeting of EU finance ministers and central bank governors, including the leader of the continent’s most powerful central bank, German Bundesbank President Hans Tietmeyer.

European Union finance ministers fixed the lira’s central parity at 990 per mark, more than 20% weaker than when speculative attacks forced it out of the ERM in 1992, but stronger than the 1,000-plus level expected by traders. The lira can fluctuate by 15% on either side of its central rate against each of the 10 other ERM members.

The lira traded Friday at 998.7 per mark.

Italy aimed for a central rate of 1,010 lira per mark. Germany and France fought hard for a lira rate stronger than 1,000 per mark, both to prevent a competitive advantage for Italian exporters and as a symbol of Italy’s commitment to a stable currency, delegation officials said.

“One thousand is the value which most people see as a good compromise between French and German demands and Italian demands,” said Marco Pianelli, the European economist at Nomura Research International.

“The stability of the exchange rate will be determined by the policy stance of the Italian authorities, particularly their fiscal policy,” he said.

With the race to adopt the planned single currency entering the home stretch and little more than a year for European countries to meet economic performance targets, rejoining the ERM brings Italy a step closer to the monetary union.

Long dismissed as a longshot for the single currency, thanks to its history of high public spending and inflation rates, Italy has made remarkable progress toward solid public finance and a stable currency.

The test of currency stability, under the Maastricht Treaty blueprint for the monetary union, is an exchange rate that holds within the “normal” bands of the ERM for two years without a devaluation.

Countries hoping to join the first group using the single currency, the euro, must also meet targets for inflation, budget deficits, national debt and long-term interest rates. All that pass the economic performance test in 1997 will be eligible to adopt the euro in 1999.

The rate at which the lira enters the ERM will be used to determine its exchange rate against the euro when Italy joins the monetary union. Too weak a central parity rate would set in stone the competitive advantages Italian exporters have enjoyed as the lira depreciated in the years after its ejection from the ERM.

Expectations that Italy will reenter the ERM have underpinned gains in Italian assets in recent months. The yield on the benchmark 10-year Italian bond fell to a record low to 7.5% this week from a high of 11% in February.

Since the lira fell out of the ERM, scores of Italian manufacturers have seen their exports, and profits, surge to new highs. That has fueled Italy’s economic expansion over the last two years even as growth in the rest of Europe has stagnated.