Global Analysis from the European Perspective. Preparing for the world of tomorrow

Italy’s parallel fiscal currency: all you need to know

By Marco Cattaneo,
from Basta con l’Eurocrisi

There is an increased talk in Italy about fiscal money as an instrument to resolve the economic crisis, which is not over yet. Despite the optimism shown by the Italian government and the EU, the Eurozone economy is far from being in an acceptable condition, and this applies in particular for Italy.

In 2017 Italy’s real GDP will grow by 1.5% compared to the previous year, which is 6% less than what it was in 2007, ten years earlier! Within the same period unemployment has doubled, the number of people in poverty tripled from 1.5 million to almost 5, and this trend does not seem to be reversing. The Italian economic system is working far below its potential: this gap has been created first by the global financial crisis of 2008 and then by the austerity policies “prescribed” by the EU in 2011. Italy can solve this problem by introducing an adequate quantity of purchasing power in its economic system. It can’t do it by issuing euros, nor (due to the mechanisms of the Eurozone) by increasing the state deficits.

All these difficulties stem from the fact that Italy is not an issuer but a user of the currency, the euro. The introduction of a fiscal currency might help to bypass the constraint that Rome cannot print money and maintain the impression that the euro works. The fiscal money concept goes back to chartalism theorised by German economist Georg Friedrich Knapp at the beginning of 1900 and then expanded by the economists adhering to the “Modern Monetary Theory” (MMT).

The basic principles of the fiscal money are two:

  1. First: it is a particular government bond that has a value given to it by the state, even if it does not enjoy the status of a legal tender. In other words, the state binds itself to accept it, e.g. for the payment of taxes or governmental services, while business and citizens are free to use it or not. .
  2. Second: as the bond is not designed to be reimbursed with the euro, which the state can no longer emit, the state is always able to honour its agreement. The bond cannot be exchanged for euros, but bondholders can use this special bond to pay their taxes or services provided by the state. It principle looks like a discount coupon that cannot be exchanged for euros but has a value, and oblige the issuer to provide a discount.

Since the state agrees to accept it but not to redeem it, it can’t default on its obligation. Such a bond is equivalent to a sovereign currency.

How can the fiscal money work in Italy?
Right now in Italy, three opposition parties are evaluating the fiscal money proposal.
Forza Italia (Berlusconi’s party), proposes 1)CCF articolo su Libero, Bastaconleurocrisi 2017-08-28. Fiscal Credit Certificates (CCF). CCFs were initially invented by Marco Cattaneo and then developed with the help of various economists and researchers in numerous articles, books and an ebook2)Per una moneta fiscal gratuita, MicroMega. that gained widespread popularity. The state emits CCFs witch gives the right to a reduction in the payment of taxation (or any other financial transaction with the public sector) two years after their emission.

CCFs are distributed in different ways: To workers to increase their income, as some reverse tax; To businesses to reduce the weight of taxation on income (which implies an immediate increase in competitiveness with foreign businesses. and prevents the economic recovery from deteriorating the trade balance);
To low-income groups as a form of social spending; as an addition to what they already get in euros.

They can also be used to finance public investment.
While the CCFs are not legal tender, they have value because everybody can use them to pay taxes or buy government services. And since they have value, they can be exchanged for goods or euros. Suppose that the Italian government issues CCFs worth 100 euros in tax. It is highly likely that commercial operators, such as shops, will accept CCFs as an alternative for the euro. Commercial operator can use the acquired CCFs to fulfil their tax obligation.

CCFs are officially not government debt and do not add to the total amount of Italian public debt. The Italian government will accept the CCFs two years after issuance, in the meantime they can be used as a parallel currency. Two years between the emission and the use to pay taxes will be enough for the economic recovery in the form of GDP increase, simply because CCFs have increased purchasing power and economic activities, and thus tax revenue increase, compensating for the reduction of state revenue caused by payment via CCFs. During the two years that they are in circulation, the CCFs will function as legal tender, and the Italian government can increase its spending by paying its expenditures partly in CCFs, and without increasing the national debt.

Movimento 5 Stelle (the movement started by comedian Beppe Grillo) has expressed interest in the model proposed by Gennaro Zezza.3)ProgrammaEsteri:Un’Europa senza austerità, Il blog delle stelle 2017-09-21.
It envisages digital fiscal money in the form of electronic cards distributed among the public. Units of value can be used for the purchase of goods and services in the private sector. Unlike the other versions of ”fiscal money”, this one would not require the 2 years delay after the emission. The use to pay taxes will be possible in installments, say 20% per year starting from the beginning.

Lega Nord and in particular Claudio Borghi, responsible for economic policies, propose the emission of “Minibots”,4)L’idea della Lega per cambiare moneta:i#minibot, Claudio Borghi 2017-01 or CCFs that would circulate in the form of paper with the same size as the euro banknotes. Minibots would be issued to businesses or individuals who have the right to a fiscal deduction. Instead of a tax deduction, the company or person receive an equal amount of “Minibots”, Minibots could be used immediately to pay taxes or as a form of payment for services by state enterprises.

Minibots do not increase the receiver’s assets because they cancel out the right of a promised tax deduction or another form of a credit of the state. It transforms, however, an illiquid credit, the government owes a private company or person, into an instrument that can circulate and be used immediately.

Fiscal money: a permanent or provisional solution?
Fiscal money is an instrument manageable by the national government to boost both internal demand and increase the competitiveness of Italian businesses by lowering the taxation. It restores in the euro-system the flexibility necessary to correct its dysfunctions, without necessarily breaking it. The emission time can be organized to ensure

  1. high levels of employment,
  2. an optimum trade balance,
  3. meeting public finance budget constraints.

When it comes to Point (iii) in particular, given a goal of fiscal deficit (the difference between expenditure and revenue of the state), the necessary level to end the negative economic cyclical phase will be obtained via an adequate level of emission of fiscal money.
The parallelism between fiscal money and the euro gives the possibility to create a stable eurozone. In this sense, fiscal money must become an instrument permanently available to governments to enact anti-cyclical policies and overcome moments of difficulty for the economy (starting with the current one). It is possible that the emission of fiscal money will lower to zero during a particularly positive economic cycle. The instrument would always be available in case of need.

Fiscal money and EU legislation
The fiscal money idea is not in conflict with any existing EU legislation. It is not a currency as the law does not force its acceptance. Therefore it does not violate the principle of monetary monopoly of the ECB when it comes to emitting legal tender, the euro. It is not public debt. Eurostat rules clarify without ambiguity that it is not debt as long as the public sector is not forced to make payments in it. Fiscal money is a non-payable tax credit: it does not create a right to be paid but a right to reduce the tax payments due. There is no due date or coupon payment. When the Italian government issues 1 billion euro future tax credits, it does not increase the national debt.

Most importantly, the regulations of the Eurozone are based on the principle of not increasing the risk of default on public debt by member states. Emitting fiscal money does not conflict with this goal because no state can be forced to default on a bond that is a future fiscal discount. The Italian government will never be forced to redeem CCFs or Minibots in the euro, a currency that the Italian state has no sovereignty over and cannot create.

Naturally, the existence of fiscal money can constitute a first step for a state to leave the euro system if at a certain point the fiscal money is declared legal tender instead of the euro. The Emission of fiscal currency comes with a risk: it could be the end of the euro. However, the real risks of the end of the euro result from the design flaws of the Eurozone and are not created by the emission of fiscal money. The Eurozone problems already exist and will continue until the ongoing dysfunctions are fixed, dysfunctions that the fiscal money helps to overcome.

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References   [ + ]

1. CCF articolo su Libero, Bastaconleurocrisi 2017-08-28.
2. Per una moneta fiscal gratuita, MicroMega.
3. ProgrammaEsteri:Un’Europa senza austerità, Il blog delle stelle 2017-09-21.
4. L’idea della Lega per cambiare moneta:i#minibot, Claudio Borghi 2017-01

7 comments on “Italy’s parallel fiscal currency: all you need to know

  • Koen Peeters says:

    The fiscal money as described is nothing less than a government debt that is kept out of the books. It is kept out of the books presumably because it is not a claim on real money but only a claim on future tax income. The mechanism is accounting trickery similar to the mechanism used by Greece under guidance of Goldman Sachs. It helped Greece meet the Maastricht criteria but proved to be toxic in the end.

    If the volume of fiscal money introduced is significant (which it has to be to have any effect) it will significantly reduce the future tax income of the government. This eventually means that the government will have to default on its other obligations: pensions, salaries of teachers, police, … unless it keeps paying these in fiscal money. Since pensioners, teachers and police only receive their net salary (their taxes are deducted in advance), they will have no other option than pushing fiscal money to the private sector. This private sector will however not absorb more fiscal money than their future taxes.

    Without significant inflation fiscal money is nothing less than a Ponzi scheme. It will eventually bankrupt every country that uses it.

  • Marco Cattaneo says:

    Wrong. It works nicely provided a significant output gap (aka mass unemployment) exists, as additional demand creates more output (and more tax receipts in due course). This is precisely the case as far as Italy (and other Southern Eurozone countries) are concerned.

    • Koen Peeters says:

      There are some additional conditions that need to be met before your proposal works nicely.

      First of all there needs to be a high liquidity for your fiscal money. This means it is widely accepted as a cash equivalent and moves between hands. If people just keep the fiscal money in a cupboard to pay their next taxes there is no liquidity. That is exactly what will happen. Private sector will consider “fiscal money” with all the restrictions that come with it, as less valuable than real money. It will only be accepted with a discount, favouring real money over fiscal money for real transactions.

      Secondly, in open economies you have no guarantee that the extra jobs because of increased demand will be created in Italy instead of in other countries like Northern Eurozone or even China. The extra jobs will only be created in Italy if the Italian job market is flexible enough. Unfortunately rigidity of the labour market is the real problem of the Southern Eurozone economies. When you solve that problem fiscal money could work, but is no longer needed.

  • The failures in Greece and Spain cccurred because they were in effect printing money: no Eurozone member was, according to the agreement, run a greater than 3% budget deficit. And in a world of fractional reserve banking, the banks are in turn free to print money- loans- with varying degrees of security. For that matter, what is generally regarded as a nation with a more respected currency, the United States, the national debt just before the introduction of central banking (what H.L.Mencken called “one of the institutions founded by the great practical jokers of the race”, was $13 billion, compared to $20,000,000 billion today. To say “All these difficulties stem from the fact that Italy is not an issuer but a user of the currency, the euro. The introduction of a fiscal currency might help…” ignores the reality thgat without a hard money standard where a nation is forced to live within its means, every sort of mischief is inevitable.

    • Paulo Marques says:

      “without a hard money standard where a nation is forced to live within its means, every sort of mischief is inevitable.”
      Because, clearly, the misery of severe forced underutilization of resources worked so well before and is working wonders now. The rise on nationalism and fascism on both times is also a minor, unimportant detail.
      Now, if only the US, Japan, China and others bothered to apply reality, then you’d see how dangerous it is to print money. Just look at the Euroland inflation after QE, what a disaster.

  • Paulo Marques says:

    This proposal brings a tear to my eyes. Not that anything sensible will likely happen, but still, that someone is thinking rationally about the economy is the best news of the last 20 years after Corbyn’s plan.


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