We have seen that the leitmotif of Italian monetary history has been fiscal dominance, that is the supremacy of the Executive in monetary policy matters. The genesis of fiscal dominance goes back to 1 May 1866 when legislation was passed that prevented banks of issue from altering the discount rate without prior government authorisation. The same legislation decided that the Banca Nazionale would grant a loan of Lit 250 million to Treasury, with the amount to be credited to a newly opened Treasury current account (conto corrente di Tesoreria). This account eventually evolved into a virtually automatic mechanism through which the Italian government could finance large portions of budget deficits. Fiscal dominance became very acute in the 1970s under the Governorship of Guido Carli (see chapter 8). The appointment of Paolo Baffi in 1975 represented an intellectual turning point in the history of fiscal dominance. But it was up to Carlo Azeglio Ciampi, who succeeded Baffi in 1980, to put into practice many of the ideas cherished by Baffi. Thus, the struggle of BI to acquire monetary policy autonomy is the principal theme of this chapter. The European Monetary System (EMS), which Italy joined under special conditions, and the Maastricht Treaty of 1991 must be seen in the light of this long overdue process of giving the Italian central bank a degree of independence it had never before been granted.

At the time of writing, BI has completed the process of central bank independence, consistent with the provisions of the Maastricht Treaty. Yet, two critical issues need to be resolved.