Antonio Fazio has been governor of the Banca d'Italia since May 1993, and is only the sixth governor since the war. That's remarkable continuity in a country renowned for the short duration of its governments. Fazio is a force both for stability and consistency.
He is not one for endless policy statements or public appearances. He demonstrates his monetary policy priorities through firm and consistent signals, and his control over the banking sector through regulation and moral suasion. And when Fazio disagrees with the government, he is forthright about it. "It's my job to persuade the government of the weak points of the Italian system," he says.
Fazio's case is furthered by the exceptional understanding between himself and Carlo Azeglio Ciampi, minister of treasury and budget in the Prodi government (and Fazio's predecessor as central bank governor). It also means the market knows that the one will not thwart the other. "There are two central bank governors in command of the Italian economy past and present Ciampi and Fazio," says one Italian economist. "It's a fantastic situation which reaps great benefits for the country in terms of stabilization and growth. They are both on the same wavelength."
Fazio's target is to reduce inflation in Italy to significantly below 3% a year. He does not think monetary policy can be a precise tool, but he would rather be criticized for having too restrictive a monetary policy than the opposite. The central bank's authority to decide interest rates is a blunt-edged weapon. Tight monetary policy dampens growth and employment prospects, and some commentators see this as an awkward burden for a man who has a highly developed social conscience and deeply held religious beliefs.
But as one senior former colleague points out: "He wants to achieve his goals in an equitable way." Fazio himself sees no long-term conflict between efficient monetary policy and social equity: "Everyone must have at least the opportunity to share in the fruits of economic progress. In Italy now this essentially means reducing unemployment, especially among young people." He adds: "It is the poorest classes which lose. When you fight inflation, there can be negative effects on employment, but in the long run the periods of greatest prosperity [in Italy] have been during periods of stable inflation."
It is clear that the central bank, legally independent since 1993, is trying hard to meet the conditions for European monetary union. However, the governor will not be drawn on the debate about the feasibility of Italy's doing so. Fazio will comment only that he wants Italian inflation down to average G7 levels.
Fazio's own credentials as a first-rate economist and monetary theorist are impressive. His degree in economics at the University of Rome was swiftly followed by a fellowship for advanced study in economic and monetary disciplines in the prestigious research department at the central bank. He then studied at MIT and in 1963, when he returned from the US, was set to work, together with Guido Rey, on the first version of the Italian econometric model that still guides the central bank in its economic policies. In 1966 the bank engaged top economist Franco Modigliani, who had been doing research with Fazio at MIT, as a consultant for the model. Says Fazio: "The model continues to provide a valid logical framework for analyzing reality and a fundamental tool in preparing the ground for economic policy decisions."
Fazio is a precise man, given to careful analysis. He made the most recent cut in Italian interest rates in July after concluding with reasonable certainty that December's annual average inflation target of 3% would be met.
Fazio is a dedicated family man who spends his summers in the tiny medieval city of Alvito, high in the Apennines, in the house where he was born.
Fazio Q&A: "Not satisfied with temporary measures"
You have made considerable strides in bringing inflation down, but how do you expect to narrow differentials with Germany from current levels?
Average inflation, as measured by increases in consumer prices, was 5.4% in 1995 and will be just below 4% this year. The Bank of Italy has set an objective of bringing inflation below 3% in 1997. As a consequence there will certainly be a narrowing of inflation differentials with other European countries.
Do you believe you have broken the back of inflationary expectations in Italy?
In the early months of 1995 inflationary expectations were worsening dramatically. They have since improved, as reflected in current surveys and government bond yields. For 10-year government bonds the differential with respect to comparable German bonds was more than 500 basis points last year, and reached 660bp. It is now around 320bp, and it has been down further.
We have not yet "broken the back" of inflation: the expected values of price increases are still too high. The point I am insisting on is that we have to reject the habit of thinking that prices can only rise; there are prices that can fall, in absolute terms, not just in terms of a reduction in their rate of increase. In July, Italy's indices of consumer prices actually fell for the first time in 28 years. Let us hope for the future.
Some players have been surprised by the firmness you have shown in controlling inflation. Do you see the need to maintain tight money in order to contain inflation as unfavourable to maintaining high employment and social equity?
A stable currency is a prerequisite for orderly economic life and sound development. It's Italy's experience: price stability and healthy public finances were conducive to strong growth and employment in the 1950s and for most of the 1960s.
What measures would you like to see taken in order to reduce Italy's structural budget deficit?
There has been a substantial improvement in our public finances over the last few years. What is needed, generally speaking, is a structural and hence lasting equilibrium of the public finances. Investors will not be satisfied with temporary measures.
Measures to reduce waste and misallocation of resources are needed in several fields. Public health services are a prime candidate. Another field is tax collection. Tax evasion is equal to several percentage points of GDP. In the pension system, imbalances can be quite significant in the long run. The system has just been comprehensively reformed, but it will be necessary to tighten some parameters in the near future. The expansion of the wage bill of the public sector must continue to be marked by the same moderation as it has shown over the last few years.