International Constraints and Domestic Choices: Economic Convergence and Exchange Rate Policy in France and Italy

Abstract

As tensions in the European Monetary System demonstrate, international capital flows can have a decisive influence on countries' economic policies. The external constraint of high international capital mobility led the countries of Western Europe in the 1980s to attempt to stabilize their exchange rates and converge toward low levels of inflation. Yet this process was not uniform: French governments pursued a rigorous anti-inflationary policy of high interest rates and a strengthening currency, while Italian governments had difficulty controlling inflation and maintaining the lira in the European Monetary System. This difference is best explained by comparing political institutions and policymaking processes in the two countries. Particular attention is given to political leaders' access to economic policy tools and their capacity to design and implement long-term goals.