Italy: Quite a Comeback

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With the foreign-tourist season nearing an end, Italians themselves were vacationing. On a single August weekend, more than 1,000,000 Romans had deserted the Eternal City, Milan had been depopulated by 700,000, and Turin by 350,000. And as they lolled on beaches or hiked up mountain slopes, the Italians could happily contemplate a national economy that ranks among Europe's strongest. It features prosperity without inflation.

This represents quite a comeback. Just over two years ago, Italy seemed to stand on the brink of disaster. Even though industrial productivity was growing, the cost of living was rising more quickly—8.8% in a year and 20% in three years—than anywhere else in the Common Market. Gold and foreign-exchange reserves had sunk to a precarious $2.1 billion, the balance-of-payments ledger showed a deficit of $1.2 billion, and devaluation of the lira was under serious discussion.

That was when Dr. Guido Carli, now 52, governor of the Bank of Italy and a sound moneyman if ever there was one, took action. Carli traveled to Washington, came back with a $1.2 billion line-of-credit offer. Though little of the credit was actually used, its mere promise helped stabilize the lira. Next, Carli imposed a tight-money policy on Italy's banking system; among other things, banks were limited in the amount of their foreign borrowing. Under prodding from Carli, the Italian government cut its own spending, added taxes on autos and gasoline.

Carli's policies were not without side effects. As he says, rather ruefully: "We have saved the lira and stabilized the economy—but we've left a lot of corpses in the streets." Among them were many small, inefficient businesses that died when their credit was cut off. But the overall results have been dramatically successful. During the past year, Italian production has risen by 8% —while the cost of living has gone up only 2%. Gold and foreign-exchange reserves have swelled to a record $4.5 billion. And the balance of payments shows a healthy $277 million surplus.

Carli is still not satisfied; he wants the government to cut back further in its spending, argues that wage and price increases ought to be tied more closely to productivity. Even so, he deserves credit for the fact that the talk nowadays is not about devaluing the lira but rather of revaluing it upward.