Italy to outmanoeuvre ECB with parallel currency

Italy is no stranger to financial crises. They came in all forms and shapes which included insolvent states, a chain reaction collapse of the banking system and a liquidity crisis of the then international currency, the golden Florentine florin. Without going too much into details, in 1345 the Kingdom of England and the government of Florence went insolvent; to pay for their respective wars against France and Verona they had borrowed enormous sums from the giants of banking of the time, the Bardi and the Peruzzi. Their inability to pay back resulted in a 1.5-million-florin hole and the subsequent bankruptcy of the two banks, which entailed a chain reaction that dragged down all the others.

Almost seven centuries later, Italy, together with Greece and many others, is again on the verge of insolvency, with the international banking system in dire straits, posed for another catastrophe. As if that was not enough, the euro, an overvalued currency for Italy and the weak economies of Spain, Portugal, France but also Finland, the austerity policy enforced by the European Commission acting under the pressure of the main gainer of the common currency, Germany; and the ECB’s completely ineffectual quantitative easing policy,¹⁾QE in Europe is an embarrassment: 18 QE euros generate a growth of 1 euro, Gefira 2016-09-23. coupled with the regulatory system to top it all are unable to boost the real economy in Southern Europe. Conversely, all these elements prevent any kind of recovery and result in a perpetual state of stagnation.

New proposal: fiscal “money’’

The idea comes from a group of finance professionals and academics who seek to bypass the ineffectiveness of the euro system by proposing that the Italian state print so called ‘’Fiscal Credit Certificates’’ (CCF), which after two years could be used to “pay’’ taxes to the Italian state. Ironically, the solution is modelled on the historical precedent from Germany: in the 30s the President of the German Central Bank, Hjalmar Schacht found a way to resurrect the German economy with the so-called MEFO (Metallurgische Forschungsgesellschaft) bills; these bills were used as a means of exchange of goods between selected enterprises, their emission was bound to the quantity of goods exchanged, and they could be discounted at the Reichsbank at any moment with an interest rate of 4%, thus bypassing the liquidity problems of the German economy,²⁾L’ipotesi di moneta fiscale in Italia? Il miglior precedente è Tedesco, Il sole 24 ore 2016-02-15..
Similarly, the acceptability of CCFs would thus depend on the possibility of using fiscal money instead of the euro to clear debts with the state. CCFs would be printed yearly, for an initial amount of 100 billion euros, in later years up to 200. After their emission, CCFs could be sold and purchased freely at their value in the euro.

The distribution would be aimed at enterprises, primarily the small and medium ones, which are the backbone of the Italian economy, and low income families, to help them tackle taxation that oppresses businesses and prevents them from becoming competitive. By effectively offering a discount on taxation, supporters of the fiscal money idea hope to stimulate employment and consumption via what is ultimately a version of helicopter money.
Proponents estimate that fiscal pressure in Italy makes up to 57% of the GDP and would thus offer businesses a chance to ease their economic activities on the condition of hiring new people. The most optimistic hypothesis sees a GDP recovery of about 15% in 3 years and a 5% decrease in unemployment,³⁾Per una moneta fiscal gratuita: uscire dall’austerità senza spaccare l’Euro, monetafiscale.it..

Criticisms and other advantages

Granted that the idea is admittedly a ‘’work in progress’’, some have argued that much of the success of the proposal would depend on how widespread the use of fiscal money can become, and pointed out that proponents in their optimistic scenarios expect a full assimilation of the CCFs in the Italian economy,⁴⁾La ‘’moneta fiscale’’, una grande o una piccolo opportunità?, Il sole 24 ore 2017-04-17..
On the ‘’leave the euro’’ side, critics have argued that the fiscal money does not correct the trade imbalances caused by the euro, which, being too weak a currency for Germany, boosts its exports, while being an inflated currency for Italy, gives Italians the illusion of a purchasing power they don’t have, while making their exports more expensive and thus less competitive. Proponents have countered that fiscal money would make Italian goods more competitive by reducing the taxation of the productive process,⁵⁾Ahi ahi Bagnai… che bella serie di cantonate… , Basta con l’eurocrisi 2013-02-09..
A second, less advertised, advantage is that it bypasses the banking system in its entirety. From the central bank down to commercial ones, they would have no say in it. Commercial banks could certainly accept CCFs and then use them to pay taxes to the Italian state, but the banking system would lose its monopoly over currency creation. As we have seen, quantitative easing has been unable to reinvigorate the economy, so it is not a bad idea to bypass its inefficient banking sector. Furthermore, should Italy ever decide to abandon the euro after the fiscal money is introduced, for example by referendum or by electing an anti-euro government, it would find itself already half way there, as tax collection and commercial activities will have already been conducted in the parallel currency.

High political feasibility.

The fiscal money idea presents two distinct political advantages compared to leaving the euro straightaway or a referendum on the common currency. First of all, it does not violate the EU treaties in any way nor requires EU approval: while the euro currency is within the exclusive competence of European institutions, the fiscal currency would be part of the fiscal arrangements of a member state, over which the only authority European institutions would have is related to balanced budgets.
Furthermore, abandoning the euro is not even a possibility considered by the treaties and the only legal way would be to invoke article 50 and exit the EU altogether. An alternative would be political arm-wrestling between the Italian government on one side against the EU institutions and the other member states on the other. Either path would be complicated, though possible.
The other major advantage relies on the consensus rallying behind the idea; so far Movimento 5 Stelle wanted a referendum on the euro while Lega Nord would like to abandon the currency altogether. In the recent months, however, Beppe Grillo, leader of M5S has opened a discussion on his blog over the fiscal money concept,⁶⁾#ProgrammaEsteri: Un’Europa senza Austerità, BeppeGrillo.it 2017-03-27.without giving up on the idea of the referendum. Claudio Borghi Aquilini, responsible for the economic policies of Lega Nord had also previously presented something similar called “minibot’’,⁷⁾I minibot del Prof. Claudio Borghi, Oltre l’Euro 2017-02-04.followed by a resurgent Silvio Berlusconi calling for a parallel currency,⁸⁾Enter Berlusconi: A Man, a Ban, and his plan to restore the Lira, Bloomberg 2017-03-09.and even Stefano Fassina,⁹⁾La proposta di moneta fiscal di Zezza è interessante, stefanofassina.it 2017-03-27.responsible for the economic policies of Sinistra Italiana, dissenters from the ruling Partito Democratico, expressed interest in the fiscal money.
The only party whose faith in the euro remains unshaken is the currently ruling PD. However, since the resounding defeat in the December referendum, political infighting and splits have severely weakened it, which resulted in their losing the lead in polls to M5S.¹⁰⁾Sondaggi, M5s cala ma diventa primo partito perchè il PD crolla. Centrodestra in testa, alle primarie Orlando secondo, Il fatto quotidiano 2017-03-04.Demographic trends are also against the Italian Democratic Party: in the December referendum, the age-group 18-35 voted against Renzi and his Constitutional reform proposal with a percentage as high as 81%.¹¹⁾Sondaggio per SkyTG24 p.12 , Il dossier Quorum/Youtrend 2016-12-04.This should not surprise anyone as recent data show that the Italian youth, facing staggering high unemployment, are giving up on the job market.¹²⁾La Disoccupazione cala perchè i giovani hanno perso le speranze, International Business Times 2017-04-05. Young Italians may have given up on the job market, but not on the right to vote against the system that left them with a gigantic debt they never made in the first place and no opportunities to work and repay it. With the approaching election, either later this year or early in 2018, the numbers behind the fiscal money idea could reach up to two-thirds of the parliament.