Lira wrestles its way back into the fold

EMU. Or not EMU?

Italy's attempt to have the lira readmitted to the European Monetary System, a key requirement on the road to a single currency, turned into a major transalpine arm-wrestling match at the weekend as officials in Brussels struggled to reach agreement on the rate at which the currency should be exchanged with its European counterparts.

Finally, after a two-day negotiating session, the currency was admitted late last night and the central parity set at 990 lire to the German Mark. At the heart of the dispute were the conflicting trade interests of Italy and its neighbours, especially France, which has complained about cheap imports flooding its markets and taking the edge off its competitiveness.

Italy entered the negotiations confident of obtaining a central exchange rate of between 1,000 and 1,050 lire to the Mark, roughly what it is trading on the open market. France, however, pushed for the stronger central rate of 950 to the Mark, the idea being not only to blunt the attractiveness of Italian exports but also to force Rome to work harder to maintain the confidence of international financial markets.

The European monetary committee spent nine hours on Saturday trying, and failing, to bridge the gap. EU finance ministers finished the job yesterday, but only after another seven hours of talks.

Italy was a founder member of the European Monetary System in the late 1970s but crashed out in 1992, at the same time as the pound, under a wave of speculative pressure triggered by the collapse of the country's post-war political system and the calamitous state of its public finances.

Rejoining has been an ambition of Italian governments ever since, especially in the last two years as the deadline for a single European currency has loomed closer. Under the Maastricht Treaty, countries need to be part of the EMS and adhere to its exchange-rate bands, for at least two years if they want to participate in the single currency. Since the first deadline for the single currency is 1 January 1999, Italy needed to get in by the end of this year to avoid being relegated to the European second division.

The push to rejoin the EMS is part of a concerted Italian strategy to qualify for the single currency in the first batch. A super-austerity budget now going through parliament is intended as a last-ditch attempt to rein in Italy's budget deficit to the satisfaction of the Maastricht criteria; last month the Bank of Italy cut interest rates to help comply with yet another condition of the Maastricht package.

Italy's pressing need to get into the EMS made its negotiating position in Brussels relatively weak, and it will now have to take care that the lira's relatively high parity does not lead to another currency crash before 1999. A weak lira over the past four years has led to booming exports, provoking the complaints from France. Italy's leading car manufacturer, Fiat, as well as many of its clothing factories competing directly with France, are situated just over the border, in the Piedmont region.