93. Memorandum of Conversation1


  • Governor Carli’s Discussion with Under Secretary Ball
[Page 181]


  • Italy (Bank of Italy)
    • Professor Guido Carli, Governor
    • Dr. Emilio Ranalli, Central Director
    • Professor Francesco Masera, Chief, Division of Economic Research and Balance of Payments
    • Dr. Florio Gradi, Representative in New York of Italian Foreign Exchange Office
    • Mr. Milesi Ferretti, Minister, Embassy of Italy
  • United States
    • Under Secretary Ball
    • Assistant Secretary G. Griffith Johnson
    • Deputy Assistant Secretary J. Robert Schaetzel
    • Mr. Benjamin Caplan, OFE
    • Mr. Herbert Spielman, WE

After an exchange of pleasantries, Under Secretary Ball led off by stating that we had been watching Italy’s economic and financial problems with great interest and took it that there had been a good turn in the past few weeks. Governor Carli replied by presenting a detailed account of the Italian economic situation along the following lines:

Italy had reached a most difficult moment and the stabilization actions of the last month had been a turn for the good. There had been no appreciable variation in the price level last month, but the major concern now was that there be no further large increases in wage costs which would lead to increased prices. Credit restrictions had been instituted last summer leading to some violent public criticism.
During the second half of 1962/first half of 1963, there had been an increase in wages which far exceeded productivity increases. The effect was a profit squeeze, which necessitated intervention to increase liquidity in order to finance previously planned investments and new projects which could no longer be financed through internal funding. Increased liquidity contributed to the aggregate amount of credit and helped bring about increased prices, which resulted in a partial reconstitution of profits. The effect of wage increases over productivity increases was a redistribution of income which caused an increase in consumption, decrease in savings, and a concentration of demand for meats and fats which had to be imported. Two-thirds of the B/P deficit was accounted for by increased food imports.
Italy would have to solve the problems of completion of its public investment program, reducing capital investment in factories, and partial substitution of real savings with liquidity. Italy’s wage explosion had been caused by higher labor mobility in the Common Market which resulted in movement of Italian wages to the levels of other EEC countries. This occurred at a time when the rapid postwar expansion in the capital market had been checked and the market itself was not fully developed. Nationalization of electricity also had had the effect of reducing the efficiency of the market in 1963. The increase in the volume of bank credit had dropped in the past two months from the level of last July. The profit squeeze is continuing and opportunities for placement of issues on the market is being reduced. Accordingly, [Page 182] the public has gotten the message of serious credit restrictions. Economic planning has become necessary regardless of which political philosophy one espouses. A list of priorities in public expenditures is needed. This will also require firm action to limit expenditures by local authorities who usually run large deficits.
The Government has two objectives: (a) To reduce the expansion of credit. (b) To reduce the rate of growth of consumption. To achieve this, the Government initiated the stabilization measures of February 22 which have shocked the country and are the subject of lively discussion. Their purpose is to make more resources available for exports and investment, are logical steps, and are making the public more aware of the existence of the problem. The Government desires an expansion in exports of about 10% per year. Italy has an integrated economy rather than a self-contained one, and must act as an open economy integrating itself into a wider market. It must increase its productivity and devote more exports to manufactured products, thus necessitating increased efficiency in manufacturing and completion of plants now under construction. This cannot be done if the price level continues to move upward. Accordingly, the Government must make the credit squeeze felt, which will probably reduce the growth of industrial expansion, but this is a price Italy must pay.

In reply to a question by the Under Secretary as to the success of the fiscal measures, Governor Carli said there had been no increase in the deficit of the federal budget, although he did not know whether there had been a marked increase in the budgets of local governments. The restrictions on credit and purchase taxes were designed to cut back consumption of consumer durables, especially automobiles. Carli noted in reply to another question by the Under Secretary that in the last two months short-term movement of capital had been a two-way traffic rather than the one-way traffic of last year. He observed that the credit squeeze had obliged some people to bring funds back to Italy.

Mr. Schaetzel asked about pockets of unemployment in Italy. Governor Carli replied some of these remained. However, the migration from South to North had been slowing down. In order to further encourage this, investments in the South must be increased to promote its development.

The Under Secretary asked about the shift in Italian dietary habits to greater consumption of proteins. Carli reiterated that two-thirds of the 1963 balance of payments deficit had resulted from imports of foodstuffs. Italy’s dietary habits had changed and there was now a demand for more meats and fats. The Under Secretary then asked if Italy could increase its consumer savings by a popular bond issue. Carli replied that the price level must first be stabilized. The Under Secretary referred to Carli’s discussions with Treasury officials seeking assistance [Page 183] in respect of Italy’s reserve holdings. Carli acknowledged he had been discussing possible financial devices to help in the months ahead, while Italy proceeded with industrialization of the South and modernization of its industry.

The Under Secretary commented that we were very sympathetic to developing the kind of defense Italy will need. The lira is an important currency. We have an interest and concern in the stability of the Italian economy following its remarkable recovery in the postwar period. We assume that the political uncertainty of last year had had a substantial effect. If the new Government shows a solidity missing last year, this should be very helpful. We are impressed by what we have seen in the way the Government is moving ahead on the political side. He then asked whether the fears of the financial community concerning the “opening to the left” had abated. Governor Carli replied that he did not feel the Government had fully explained the scope of the measures it was taking, and thought a better job could be done in this regard, especially in pointing out the curtailment of public expenditures.

In reply to a question by Mr. Johnson as to whether the EEC tariff reductions had affected Italy’s competitive position, Mr. Ranalli stated that the problem was not one of competition, but one in which Italian demand had been larger than supply. As for automobile imports from the EEC countries, only 1/5 of Italy’s 44% increase in automobile registrations last year had resulted from foreign car imports.

The Under Secretary concluded the discussion by expressing his appreciation for Governor Carli’s lucid exposition of Italy’s problems, and stated that we wanted to be as helpful as we could in solving them.

  1. Source: National Archives and Records Administration, RG 59, Central Files 1964-66, POL IT-US. Limited Official Use. Drafted by Spielman and approved in U on March 18. The meeting was held in the Under Secretary’s office.