“I have long since developed the opinion that many problems of monetary policy management are made more acute by an insufficient autonomy of the Bank of Italy's conduct with respect to the financing needs of the Treasury”. These words are contained in a letter which turns 40 today and which can rightly be considered an historical document. The then Minister of the Treasury, Beniamino Andreatta, wrote to her on February 12, 1981, to the number one of Bank of Italy, Carlo Azeglio Ciampi. It was the beginning of one of the most important turning points in the economic history of Italy: the divorce between Via Nazionale and Via XX Settembre.
The separation between the two institutions was initiated in July of that same year and brought about fundamental innovations. The Bank of Italy it was no longer forced to buy bonds that the government could not place on the market, a mechanism which effectively financed the public deficit with the expansion of the money supply (which in turn produced inflation).
Also, since then the interest rate to be paid to those who buy Italian government bonds is decided by the market: without the parachute provided by Bank of Italy, what counts is only the law of supply and demand.
This change was opposed by the finance minister, the socialist Rino Formica, who wanted to impose on Via Nazionale the repayment of at least a part of the unsold bonds.
However, it should be remembered that the economic context of that period it was dramatic, with soaring inflation – due to the second oil shock – bringing with it a rapid rise in interest rates.
The divorce between the Treasury and the Bank of Italy contributed decisively to stabilize inflation (which went from 20% in 1980 to 5% in the following years) and guaranteed the independence of monetary policy (decided by the Central Bank) from fiscal policy (which is the responsibility of the government). However, due to the welfarist and lack of rigor economic policy, the divorce could not stop the strong growth in public debt Italian in those years, because since then the expenses not covered by tax revenues were financed entirely with the placement of securities on the market, without Bankitalia being able to provide any life preserver.
Below is a passage from an article written for FIRSTonline by Filippo Cavazzuti, who was first a pupil of Andreatta and then a close collaborator at the Treasury.
"Divorce was not a mere technicality, but the need to safeguard the authority of the State in controlling public finance imbalances which required the involvement of the Bank of Italy, which was then accused of influencing Parliament, through the maneuver of monetary policy and interest rates, on issues of public finance balance. Perhaps there is some truth to it, but it is also true that, by dodging Parliament, the Italian public debt rose from 53% of GDP in 1981 to 100% of the same in 1990. It is the burden that we have been carrying around ever since, that on international markets contributes to cast doubts on the sovereignty of the State".
To Andreatta's letter, Ciampi replied on 6 March of the same year: «Dear Minister – the Governor began – I am replying to your letter of 12 February, whose lines of reasoning I find substantially in agreement with…».
