A choice for Europe, a choice for growth? The Bank of Italy, the Pandolfi Plan and the European Monetary System, 1977–1979

The creation of the European Monetary System (EMS) between 1977 and 1979 introduced an element that would become central to Italy’s strategy of adjustment to the macroeconomic shocks of the 1970s: the ‘external constraint’, a political device — albeit with a technocratic matrix — designed to reduce public debt and enhance the country’s economic competitiveness. Conceived by an economist at the Bank of Italy, Tommaso Padoa-Schioppa, in 1978, the reforms of the ambitious programme known as the Pandolfi Plan were designed to restore the competitiveness of the Italian economy. The plan described the main features of the lira’s entry into the EMS as an external constraint, based on indications from the Bank of Italy’s Director General Carlo Azeglio Ciampi and despite objections from Governor Paolo Baffi. At that juncture, the Bank of Italy consciously assumed the role of substitute that would characterise its action in the following decade, motivating and orienting the country’s political choices in favour of an ever more urgent economic and monetary integration of Europe, towards what would finally be formalised with the Maastricht Treaty. Consistently with the structure of the EMS, the external constraint outlined in the Pandolfi Plan moved towards exchange rate constraints related to public finances and to the phenomena of fiscal dominance typical of monetary policy in Italy; it was essentially transformed into a fiscal policy constraint formally recognised in July 1981, with the so-called divorce between the Bank of Italy and the Treasury. The classic external constraint related to the balance of payments accounts and foreign exchange rates remained unchanged towards the rest of the world, meaning that it had an economic and not a “legal” nature, as defined by Guido Carli in the early 1990s.