Flight of the Lira

Smuggling currency abroad has long been a national pastime for Italians. For nearly a decade they have been carting lire by the billions across the border, partly to evade domestic taxes and partly in response to better investment opportunities in other countries. Though aware of the illicit traffic, Italian governments have tolerated it as comparatively harmless in a thriving economy.

In recent months, the practice has not only risen to alarming proportions but has emerged as the symptom of a deep-seated economic malaise. Last year the illegal flight of lire rose to $2.25 billion, enough to wipe out the benefits of Italy's overall trade surplus and create a $1.37 billion balance of payments deficit. A winter wave of strikes cost many industries the equivalent of a month's production. The resulting wage increases (average: 15%) have been followed by rising prices.

Weak Governments. To a considerable degree, the outflow of lire also reflects Italy's political troubles. Last week President Giuseppe Saragat was seeking someone to try to form the country's 28th Cabinet since World War II, following the resignation of Premier Mariano Rumor. Progressively weaker governments have failed to grapple with the country's Byzantine state bureaucracy or to create an attractive climate for investors by, for instance, modernizing Italy's corporate laws. Investors avoid the Italian stock exchange, because manipulation by insiders is common and because disclosure of corporate revenues and profits is minimal. While Italy starves for venture capital, its citizens more and more seek outlets for their funds abroad.

The smuggling operation is simplicity itself. Italians hide wads of bills in suitcases, skiing gear, golf bags and false compartments of their automobiles. Border guards manage to seize only about 5% of the money. Once out of Italy, travelers make straight for one of the Swiss banks that are clustered almost as thickly as espresso bars in towns along the frontier. When deposited, the freely convertible lire are mostly used to buy Eurobonds or mutual-fund shares. Until last month, the Swiss banks had only to mail the lire to their nearest correspondent bank in Italy to receive full credit in any currency.

Discount for Delay. Fearing a serious balance of payments crisis, the Bank of Italy then acted to stanch the flow of lire. In a stunningly simple move, the bank decreed that lire from abroad would henceforth be converted to other currencies only at the bank's headquarters in Rome. It also made it clear that clerks would take their time handling the transactions. Swiss banks immediately passed on the cost of delay by accepting lira deposits only at discounts of up to 10%.

Coming atop Italy's other problems, the action was enough to bring the once strong lira down to 650 to the dollar last week, its lowest level since 1952. The irony is that Italy's labor costs are lower than those of any other industrialized country, and rapidly rising productivity will offset much of the wage increases won in the autumn strikes. Yet to achieve the rate of investment necessary for the economy to continue to grow, the country needs a government capable of inspiring confidence. Until such a government comes to power, even Italian officials admit that the new rules will not stop the flow of lire across the border.

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