ABSTRACT
Following upon a long expansion lasting ever since 1983, in 1992 Italy faced one of the harshest recessions of the post-war period with a high public debt and the lira leaving the EMS in September and undergoing a strong depreciation. However, the recession, as well as the introduction of a restrictive budgetary policy aimed at honouring the European agreements, and indeed a new incomes policy, succeeded in curbing the inflation dynamics. The awareness of getting through a period of social and economic emergency paved the way for a deep reform of wage agreements to control wage dynamics (bound to macroeconomic variables and excluding automatic indexation) which started in July 1992 and was completed in July 1993. This led to a major wage differentiation and to lesser sensitivity of wages to price variations and indirect taxation. Indeed, during the further period of monetary instability affecting the Italian economy in 1994-95 at the beginning of the recovery, neither prices nor nominal wages showed significant increases. The persisting restrictive budgetary and fiscal policies brought Italy into the first phase of the European Union in late 1998, though it still suffered from a feeble economic growth and a high and persistent unemployment rate.
