The G7 Summit: Italian new broom cleans up tarnished image: Guiliano Amato, the Prime Minister of Italy, has been busy improving his country's standing at the summit, write Andrew Marshall and Peter Torday

ITALY went on the offensive at the G7 Economic Summit yesterday, trying to give its heavily tarnished image a much-needed political boost. Guiliano Amato, the new Italian Prime Minister, had held bilateral talks with every summit leader, including Jacques Delors, the EC Commission President, even before the summit proper began. Only Chancellor Helmut Kohl, the summit host, managed to match Mr Amato's performance.

The Italian Prime Minister's aim was twofold - to explain the emergency financial measures taken over the weekend and to assure Italy's allies that a new anti- corruption era has begun after three months of embarrassing political deadlock over the formation of a new government.

The intensive round of Italian diplomacy may have come just in the nick of time. The problems are already mounting up for Mr Amato's government, only confirmed by Parliament on Saturday. Strikes disrupted air travel yesterday and unions all but closed down the railway system to protest at job cuts. Mr Amato's 'corruption-free' administration is dogged by potential scandal surrounding the new Finance Minister, Giovanni Goria. And the Italian lira came under heavy speculative pressure in the London markets just before the summit was due to be held.

Against considerable odds it looks as if Mr Amato's campaign in Munich had some success. British officials praised Mr Amato and said that John Major, the Prime Minister, was 'impressed by the strength' of the Italian assault on its massive budget deficit. Other countries also went out of their way to laud the Italian measures. Luckily for Mr Amato, tradition dictates that the Treasury Minister - Piero Baruchi, a former banker - and not the Finance Minister, attends world economic summits.

Even before the summit, Mr Amato signalled his determination to come to grips with the problems. On Sunday he announced proposals to slash the budget deficit by 30 trillion lire ( pounds 14bn), chiefly through higher indirect taxes. The Bank of Italy also lifted the discount rate by a full percentage point, to 13 per cent, to stabilise the lira's standing in the European Monetary System.

The Prime Minister also promised future cuts in public spending to make further inroads into Italy's massive budget deficit, which at 12 per cent of national output far exceeds the budget shortfall of any other European community country. The deficit is set to hit 160 trillion lire in 1992.

The monetary moves were well received by the markets, as well as by Mr Amato's colleagues. The lira had plunged briefly on Friday to 760.25 to the German mark, just five lire above its limit in the European Monetary System. It closed at 756.55 yesterday, its rise soothing fears of an imminent realignment in the EMS.

Bankers said the move had at least bought some time but they were still awaiting further proof of Mr Amato's resolve. 'The job is not complete, but they have shown a stronger than expected determination,' said Giorgio Radaelli, an economist at Lehman Brothers, the merchant bankers, in London.

Mr Amato has an ally in the country's central bank, which is determined to lick the economy into shape. Italy's decision to raise the discount rate highlighted a tightening of interest rates, which had been under way for some time. It thus provided a convenient flag for Mr Amato to fly as he began his first large-scale international meeting.

It underlined the determination of Italy's central bank to maintain the lira's rate in the European Monetary System. There had been speculation that that the currency would be devalued. But the Banca d'Italia, one of Europe's most independent, has shown it does not want to run this risk. Italy entered the narrow band of the EMS in 1990, and saw a considerable fall in interest rates as a result; this has also helped build confidence in the bank's supervision of monetary policy, says Mr Radaelli.

But, as in Britain, using interest rates to prop up the currency is not without its costs. A rise of interest rates on the scale undertaken at the weekend adds about 10 trillion lire to the cost of servicing Italy's massive government debt and with budget cuts, will cut growth.

The next step is up to Mr Amato. He must deliver on his promise of a mini-budget. Though few expect it to be of the size advertised, anything over 20 trillion lire will comfort bankers. The government has a slim majority, and it is confronting powerful entrenched forces. But financial analysts have been reassured both by the bank's strong stance and by the make-up of Mr Amato's new team.

The Italian Prime Minister clearly believed that it was not enough to rescue Italy's image with technical measures alone. A diplomatic effort was needed too, which explains his round of consultations at the summit's start. But it remains to be seen whether this has been enough. He has attracted support from abroad; can he have similiar success at home?

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