The rise in oil prices of 1979-80 had caught the Italian economy following the adhesion of the lira to the exchange rate agreements of the EMS and the devaluation that had preceded them, while the effort to consolidate production, especially in the sector of medium and large industrial enterprises. Inflation had rapidly started to rise again, exceeding 20% in the course of 1980; the spread of indexation mechanisms and the sharp slowdown in the development rate of the main industrial countries (and therefore of our exports) following the new oil shock risked causing a perverse spiral between production stagnation and the inflationary process. The appreciation of the dollar, which was to last until the early months of 1985, was a further driving factor. The response of economic policy, however, was rapid, especially in the monetary and exchange rate component, and effective though gradual in its effects. Without the economy experiencing negative rates of development, inflation fell from 21.7% (in terms of consumer prices) in February 1980 to 8.6% in November 1984. After a lull in 1985, with the arrival of the oil counter-shock and the decline in the dollar it continued to decline, falling below 5% on the 1987 average.
The holding of the lira in the EMS, carried out by adjusting the nominal exchange rate with delay and not fully to the more rapid increase in domestic prices compared to the other EEC countries, was the cornerstone of the fight against inflation. This was accompanied by a monetary and credit policy careful not to support a dynamic of domestic demand, in the presence of a substantially expansionary budget policy, incompatible with the rebalancing of the external accounts and the stability of the exchange rate. Initially, this policy, in addition to a progressive increase in interest rates (the discount rate went from 15% to 19% between the end of 1980 and the first quarter of 1981), was also expressed through the tightening of the ceiling on bank loans; the greater degree of monetary restriction was reflected in a rapid increase in real rates, which became largely positive during the 1980s. The non-accommodative stance of monetary policy also resulted in an institutional change, the so-called ” divorce ”, that is, the abandonment by the Bank of Italy of the role of residual purchaser of the securities issued to cover the needs of the Treasury. This decision increased the degree of independence of the central bank in the regulation of the monetary base and the credibility of the policy of non-accommodation of the exchange rate. From April 1983, as the most acute phase of the inflationary tension passed, nominal interest rates began to decline in line with the slowdown in inflation,
The slowdown in inflation also contributed to wage moderation induced by the high levels reached by the unemployment rate and by the change in the climate of industrial relations that took place in 1980. The income policy and social agreements previously implemented with an overall agreement also contributed to it. between the social partners (“Memorandum of Understanding” of January 1983), which had, among other things, the effect of reducing the degree of wage indexation by 15%, and then with the government’s policy of predetermination, respect to an inflation target announced, of the escalator spurts in the first half of 1984.
This last measure gave rise to a notable conflict, not only at the political level but also within the trade unions; the restoration of the contingency points not granted in 1984 was subjected to a popular referendum. It was rejected in June 1985. At the beginning of 1986, the sliding scale mechanism was therefore substantially reformed, making the adjustment of wages to the cost of living every six months and guaranteeing full indexation only at a minimum wage level: reduction of the average degree of indexation up to about 50%.
With the oil counter-shock of 1986, the return of inflation, which began at the beginning of the decade, received a decisive impetus. The gain in terms of trade, common to all industrialized countries, also led to a strong growth in demand, giving further strength to the expansionary phase that began in 1983. The accumulation of capital benefited above all from this, which gradually revolted., after the intensive process of productive restructuring, to the expansion of capacity. Income growth averaged over 3%; employment has started to grow again at satisfactory rates, so as to stop, despite the continuous expansion of the labor supply, the trend towards
The improvement in the general conditions of the Italian economy made it possible to look with greater confidence at its full integration into the European Community; in the autumn of 1988, the process of currency liberalization which had gradually accompanied, together with the abandonment of administrative credit controls, the return from inflation was almost completed without tension.