Return to ERM gives lira a boost

International financial markets yesterday heralded the return of the lira to the exchange rate mechanism with a surge of confidence that boosted shares and bond prices as well as the Italian currency, as government leaders and economic analysts sounded more hopeful about the country's prospects of joining the single European currency on time.

The lira, which crashed out of the ERM at the same time as sterling in September 1992, was readmitted to the currency grid late on Sunday night after a fraught weekend of negotiations in Brussels over the central parity at which it should be traded. The parity finally agreed, 990 lire to the German mark, was stiffer than the Italian government and Italian exporters had been hoping for, but was only a shade stricter than the values at which the lira has been trading recently on the open market.

In yesterday's euphoria, the currency actually finished the day at or near the newly agreed central parity - a marked jump from the rate of 999 to the mark at which it had started the day."Four years of painful exile have finally ended," commented Italy's Treasury Minister, Carlo Azeglio Ciampi.

The news was greeted with greater caution by the country's industry federation, which has reaped the fruits of four years of booming exports and fears that a stronger, albeit more stable, currency will lead to a sharp slowdown in growth.

The parity may not in the end matter too much since the ERM allows for a 15 per cent fluctuation either way. But the argument that the issue has generated in Italy is a symptom of broader misgivings about the sacrifices necessary to prepare for European integration.