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Italy Faces Danger Of Mexican-style Crisis

Problems could lock it out of EU's common currency

MUCH like the United States dollar, the Italian lira has been caught in a tail spin on the international exchanges in recent weeks.

Since businessman Silvio Berlusconi won the country's parliamentary elections more than a year ago, the currency has lost about 40 percent of its value against the mighty German mark.

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Even worse, a recent study for the European Parliament finds that economic problems -- such as the state debt and budget deficit -- threaten to lock Italy out of the European Union's (EU) common currency, to be created by 2000.

Among EU member states, only Greece is in a similar situation. But the situation is especially embarrassing for Italy since the plan for a European Union was launched here by the Treaty of Rome in 1957.

''It has been several weeks now that I've been repeating that Italy is heading toward a Mexican-style crisis,'' writes Franco Modigliani, a Nobel Prize economist and professor at the Massachusetts Institute of Technology, in the respected Corriere della Sera newspaper. ''Whoever wants to look reality in the face would do well to recognize that, as in Mexico, the devaluation [of the lira] is due to capital flight that reflects the lack of faith in the country and in its governability on the part of those who invest and, primarily, of those who are its own citizens.''

Italy can make it

Although the facts are sobering, Italy can make it, says Giorgio La Malfa, a member of the European Parliament and leader of Italy's small Republican Party. ''The correction of these imbalances is not difficult,'' he says. ''The Italian problem is political, not economic.''

What Italy needs, he suggests, is a broadly backed government that will impose fiscal austerity and last until Italy is assured of participating in the proposed European currency.

The conditions established in the Treaty of Maastricht for joining the new currency include: EU member states cannot have a rate of inflation over a period of one year that does not exceed by more than 1.5 percent the average of the three member countries with the lowest rates of inflation; the public budget deficit cannot exceed 3 percent of the gross national product; and public debt as a proportion of gross domestic product cannot top 60 percent.

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Italy's inflation rate in 1993 was 4.4 percent, compared with an EU average of 3.4 percent. The public deficit was 10 percent of GNP, compared with an EU average of 6.4 percent. And the public debt as a percentage of GNP was 116 percent, compared with the EU's 66 percent.

The country's public budget deficit could be virtually wiped out by increasing the government's tax revenues by 50 trillion lira ($33.87 billion) or about 10 percent of the state's fiscal intake this year, Mr. La Malfa says.

Economist Paolo Savona, who initially made the proposal, says this increase would lower interest rates by a couple of points, thus reducing the government's interest payments by 45 trillion lira. The two figures together practically make up the deficit of 100 trillion lira.

Another solution, of course, would be to crack down on tax evasion, which is rife in Italy. But to do this would require an overhaul of the public administration and a sharp change in Italian civic attitudes, La Malfa says, none of which could be accomplished overnight.

Taking serious action

Taking serious action against the deficit, La Malfa continues, would reassure the international markets and allow the lira to return to the European Monetary System, from which it withdrew in 1992.

''The financial markets have to know that you're doing what is necessary, and that you will do what is necessary to comply with the conditions'' outlined in the Treaty of Maastricht, he says.

The lira took its worst beating earlier this year, when Mr. Berlusconi, the former prime minister, called for early parliamentary elections and said the government of his successor, incumbent Prime Minister Lamberto Dini, was illegitimate because it was not supported by the victorious political parties in last year's elections.

In La Malfa's opinion, the international markets have punished the lira, at least in part, because they are troubled by political conflicts and because they understand that only through a joint effort will Italy be able to overcome its economic difficulties.

According to his opponents, Berlusconi, insists on early elections, which he would stand a good chance of winning, in order to forestall political actions against his business empire, which includes three TV networks that compete with the three state-owned networks. Such steps include proposed antitrust legislation and a referendum expected later this year that could strip him of one or more TV networks and sharply limit his advertising powers.

Berlusconi, on the other hand, says only a government that is elected by the Italians and that represents their current political position will be capable of calming the international markets; hence his call for early elections.

La Malfa doubts that either Berlusconi, who made a campaign promise not to raise taxes, or his left-wing opponents would have the political will to take the tough steps needed to balance the budget and reduce the public debt.

He proposes leaving the Dini government in place until the end of 1996, with the responsibility of creating the 1995-96 and 1996-97 budgets.

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