Central bank proposes tough measures to heal economy.

The annual address by the governor of the Bank of Italy is traditionally critical of the nation's economic performance. But this year's commentary -- delivered May 30 by Carlo Azeglio Ciampi -- was more of an utlimatum to initiate economic recovery.

Mr. Ciampi warned that if the government does not take measures immediately, "within the next few weeks," Italy's high inflation rate and huge public-sector defict risk leaving the county out of Europe's monetary union laid out at Maastricht.

And Italy "could be held responsible for becoming an obstacle to the whole construction of Europe," Mr. Ciampi said.

"The European Community watches with increasing preoccupation Italy's delay in meeting requirements for monetary union," Mr. Ciampi reminded the audience of business and banking leaders.

Italy's Soaring Deficit

Over the past few months, EEC partners have issued several warnings to Italy that it will be excluded from monetary union unless it reduces its soaring deficit -- currently the equivalent in lire of $132 billion -- and its 5.8% inflation rate, which is 2 to 3 points higher than the European average.

"Economic policy must tackle the causes with immediate and permanent interventions," he said.

The central bank chief prescribed tough measures, including:

* Income tax hikes.

* Curbson public and private-sector wage increases.

* Cuts in government spending.

These budget measures would amount to about $74 billion, equivalent to 6% of gross domestic product for the next 18 months. To further increase revenue, Mr. Ciampi urged the government to fight tax evasion with renewed decisiveness.

'Europe Cannot Wait'

Flanking these measures, Mr. Ciampi underlined the need for industry to increase competitiveness. He said that with "vigorous competition, the Italian economy has an unexploited potential to increase productivity to cool inflation."

A few days earlier, Italy's newly elected president Oscar Luigi Scalfaro delivered the same dramatic message to parilament in his inaugural speech.

"The state deficit requires sacrifices and I think everyone agrees. We are aware that Europe cannot wait," Mr. Scalfaro said.

"I am certain that we cannot give up Europe, but I am not as sure of the contrary," commented Carlo Salvatori, director general of Banco Ambrosiano Veneto.

"Indeed, the country has disregarded too many signals, even strong ones, from the national economy and from our European partners.

"And now our days are numbered for making decisions that bring us to convergence with the European Community," Mr. Salvatori said.

Public Opinion Jolted

But, as Mr. Ciampi notes, it will take a strong government to implement unpopular austerity measures. It is not certain whether the new government will have the necessary authority.

However, in addition to warnings on the economy, public opinion has been jolted by recent Mafia killings. And a scandal is now unfolding in Milan involving kickbacks from businessmen to local politicians. In this corrupt arrangement, votes and financial support are swapped for public contracts.

Italians appear to have lost their patience for a system that hangs together on political patronge. They are beginning to demand earnest change from their politicians and decisions from their government.

Fight Against Organized Crime

Mr. Ciampi pointed out that, only a week earlier, Italy's leading anti-Mafia magistrate Giovanni Falcone had been brutally assassinated along with his wife and three body guards.

To strengthen the fight against organized crime, Mr. Ciampi said that new laws had become necessary to prevent money-laudnering and to allow revene authorities to derogate the bank secrecy code.

Mr. Ciampi underlined the necessity for Italy's banking system to play a more direct and active role to bar money-laundering.

Legislation Needs Update

For the banking sector, Mr. Ciampi spelled out two essential areas for intervention. First, he stressed the reorganization of 50 years of banking legislation under a single, easy-to-consult text.

Second, he said, Italian legislation must be brought into conformity with theEEC directive standardizing credit matters.

Once such legislation is adopted, Italy's banks would be allowed to:

* Merge with specialist credit institutions.

* Hold stakes in industry.

The directive introduces a wider concept of what a bank is -- defining a bank as multifunctional. It lists 14 financial activities in which a bank can operate.

Cross-Border Possibilities

The effective also establishes a reciprocity agreement between EEC members, allowing a bank to open branches freely in another member country, while remaining under control of banking authorities in its own country.

The EEC directive is expected to go into effect with a special government decree next month.

Given the currently weak economic situation, the Bank of Italy has asked commercial banks to pursue a more moderate credit policy, by restricting the extension of credit and keeping interest rates at relatively high levels.

Italian banking executives, while concurring on the need to monitor new credit lines more carefully, dispute the notion that this policy is faultless.

Key Role for Banks

"When the economy is in difficulty, the role of banks is very important," confirms Sandro Molinari, director genral of cassa di Risparmio delle Province Lombarde, or Cariplo.

"Banks must help improve economic conditions by maintaining faith in businesses and applying reasonable interest rates," he said, adding: "High interest rates don't alleviate an economy in difficulty."

Cariplo, Italy's largest savings bank, applies rates one point lower than the national averge and the lowest indicated top rate, Mr. Molinari pointed out, "and, these efforts are well appreciated by our clients."

Mr. Salvatori at BAV notes that "the Italian market leaves little space for [interest rate] policies independent or, in any event, unalignet with those traced by monetary authorities and the treasury."

He said the bank tries to maintain maximum competitiveness by negotiating conditions consistent with the market, but also with the quality of the offer in terms of transparency, timeliness, and product range.

Preparing for Single Market

Several banking executives also said they would like to see the Bank of Italy lower the reserve requirements which verge on 19.9% of deposits in Italy, compared with less than 5% in trhe rest of Europe.

The executives said the move would increase the ability of Italian banks to compete in Europe. This ability is vital in view of the upcoming EEC unification into a single market.

Ms. McCarter is a Rome-based journalist specializing business and finance.

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