Lira up as Italy's tax for Europe gets go-ahead

Italy's bid to become a founding member of the single European currency in 1999 was significantly boosted yesterday after it received the go-ahead from Brussels to use its controversial "tax for Europe", a one-off levy on personal incomes, to reduce its deficit to meet the Maastricht criteria.

The lira rose to 986.80 against the mark yesterday following the EU decision, and in response to remarks by Italian Prime Minister Romano Prodi, and Bundesbank council member Ernst Welteke, which increased traders' expectations that Italy would join EMU in the first wave.

Eurostat, the EU's statistical watchdog, ruled that the new Euro-tax, expected to raise around L12,000bn (pounds 4.5bn), can legitimately be employed to slash the national budget deficit this year.

Questions had arisen that one part of the tax, worth around 0.19 per cent of GDP, was in fact a loan rather than a sustainable way to reduce the deficit, because politicians had promised to repay the tax in future.

Mr Prodi said yesterday: "Europe is within reach." Italy was still L6,000bn to L14,000bn short of meeting the Maastricht criteria, hence the need for a mini-budget later this year, he said.

Aware that Germany is deeply uneasy about Italian entry into EMU in the first wave, Mr Prodi said: "Europe is not just about a currency. It is impossible to think of Europe cut off from its great Latin culture ... If we are not in the first group, our currency would come under assault, our economy would be defenceless, our international credibility would be diminished."

Earlier this week, the lira fell against the mark as traders began to think that Italy could not make the first wave. Yesterday the lira regained some of that ground. But it was also helped by concern that Germany itself might not make the Maastricht criteria.

Mr Welteke said yesterday: "I share doubts that Germany will meet the fiscal criterion's reference value this year."