The rationale for different exchange rate policies: Italy and France after World War II

After the Second World War, and until the mid-1960s, France and Italy adopted two different monetary and exchange rate policies as a consequence of the relative degree of commitment to the opening of their respective domestic economies. While the Italian economy was oriented to a gradual opening of the domestic market, which indeed implied a substantial strengthening of the national manufacturers and producers, the French economy was less clearly committed to open her domestic market, with some consequences on the exchange rate policy. After the World War both Italy and France stabilised rather shortly, even though at slightly different times, in 1947 and 1948. Notwithstanding, in 1949, in the wake of the Marshall Plan aids and US confronting a recession phase, all the European countries devalued against the US dollar to a very different extent. If Great Britain and the sterling area devalued strongly, by 30 per cent, Italy was less prone to adjust her currency to such a hard measure, whilst France opted for a rather robust rate in between: thus, Italy devalued by a modest 8 per cent and France by 22 per cent (Milward, 1984; Eichengreen 2007). In the ensuing decade the Italian central authorities, especially the Bank of Italy, engaged themselves in stabilising prices and gradually pegging the currency to the dollar on a stable basis. A relatively low exchange rate was adopted and Italy successfully pegged her currency to the dollar in 1950 at nominal 624,8 liras against the US dollar. Such an exchange rate and the parallel trade liberalisation policy favoured a subsequent export-led growth period with positive effects on the output and industrial dynamics. Instead, until the late 1950s France adopted a strong currency policy in order to preserve the national grandeur, even if this had some relevant effects on the price stability and the macroeconomic performance. In 1957, finally, France devalued and shifted towards the dismantling of domestic barriers to foreign manufacturers. According to the existing literature this difference in the exchange rate policy had an important impact on investments and on the related productivity growth rate in these countries. The deferred exchange rate adjustment in France entailed a parallel deferred increase in investments and technological updating of the industrial sector in the country (Boltho, 1996a). As observed, indeed, the French economic growth gained momentum after the 1958 substantial change in economic policies, with the significant currency depreciation of 1957-58 and the upsurge in competition stemming out from the gradual opening of the domestic market and from the rise of the infra-European trade (Sicsic and Wyplosz, 1996). Even at a first sight the increase in per capita growth rates both in France and Italy is related at the exchange rate policy, even if the role jointly played by the other relevant policy of economic opening is not always assessed as a part of the same bundle of coherent economic policies. Thus, it may be useful to compare exchange rate policies and trade policies in these couple of countries which experienced a similar economic ‘miracle’ in the 1950s-1960s, although they started to grow at a significant pace at different times as a consequence of a lag in the change of economic policies. In a way, the French choices of the late 1950s seem to follow and replicate what the Italian central authorities decided to reach almost a decade earlier: the integration in a regional European market through the dismantling of tariffs and restriction to imports, the price stabilisation and convertibility of the currency after having reached a low depreciation in real terms. Such a policy produced a long term effect on the productivity growth rate as a result of conspicuous investments and technological transfers, on one side, and a reallocation of factors, both by sectors and regions, on the other one. The Italian economy started growing at a high rate from the mid-1950s, after a prompt stabilisation and a robust anchorage of the lira to the dollar at a favourable real exchange rate. Such a choice was arguably responsible for an upsurge in exports and investments with relevant gains in productivity. A similar scheme was adopted by French authorities only in the late 1950s, after a period of price instability and rationing.