Rome can regain control of its monetary policy without breaking the rules of the eurozone…
In Joseph Stiglitz’s recent article for the POLITICO Global Policy Lab (“How to Exit the Eurozone,” June 29, 2018), the Nobel-prize wining economist proposes that Italy issue a parallel currency as a way to retake control of its monetary policy.
It’s an insightful idea, and one worth exploring. However, Stiglitz is wrong when he suggests that “introducing a parallel currency, even informally, would almost certainly violate the eurozone’s rules and certainly be against its spirit.”
Our organization – the Group of Fiscal Money – has been very active in developing and promoting such a dual-currency scheme.
We call it “Fiscal Money” and believe it could be used to avoid the uncertainties of exiting the euro while allowing Italy to recover economically without breaking any EU rule.
Our proposal is for government to issue transferable and negotiable bonds, which bearers can use for tax rebates two years after issuance. Such bonds would carry immediate value, since they would incorporate sure claims to future fiscal savings. They could be immediately exchanged against euros in the financial market or used (in parallel to the euro) to purchase goods and services.
Fiscal Money would be allocated, free of charge, to supplement employees’ income, to fund public investments and social spending programs, and to reduce enterprises’ tax on labor. These allocations would increase domestic demand and (by mimicking an exchange-rate devaluation) improve enterprise competitiveness through a reduction in the cost of labor. As a result, Italy’s output gap – that is, the difference between potential and actual GDP – would close without affecting the country’s external balance.
Unlike Stiglitz’s conclusion, our proposal is fully consistent with the rules of the eurozone and might very well be a permanent set-up for the whole eurozone going forward.
Note that under Eurostat rules, Fiscal Money bonds would not constitute debt, since the issuer would be under no obligation to reimburse them in cash. Also, as non-payable tax assets (of which many examples already exist), they would not be recorded in the budget until used for tax rebates — that is, two years after issuance when output and fiscal revenue have recovered.
While we verified this debt-related issue extensively from both the legal and accounting standpoint, it is also important to add that the reason for not including non-payable tax liabilities (and Fiscal Money as such) in a country’s public debt calculations under the Maastricht treaty is a matter of substance, not just of form. The reason is that a non-payable liability does not bear any default risk due to the lack of repayment capacity from the liability issuer.
Based on conservative assumptions, we calculate that Italy’s GDP growth over the two-year time period would generate additional tax revenues sufficient to offset the tax rebates. Projections show that these would peak at around €100 billion per year, compared to Italy’s total government revenue of more than €800 billion. Thus, the cover ratio (that is, the ratio between government gross receipts and tax rebates coming due each year) would be large enough to accommodate for possible shortfalls due to future recessions.
In any case, safeguards would be provided within the law governing Fiscal Money to ensure Italy’s full compliance with EU fiscal rules. Such measures would consist of spending cuts and/or tax adjustments that would be triggered automatically in the event of fiscal underperformance, compensated by additional issuances of Fiscal Money in favor of those who would be otherwise hit by the fiscal adjustment. The high cover ratio would afford enough space for this.
By activating a Fiscal Money program, Italy would solve its output gap problem without asking anything of anybody. No European treaty revisions would be required. No financial transfers would be needed. Public debt would stop growing and start declining relative to GDP, thus attaining the EU fiscal goals under the Maastricht Treaty.
Have we found the philosopher’s stone? Certainly not – but in an economy with large resource slack, the multiplier works its effects largely on output and moderately on price. And if external leakages are contained (which increased competitiveness would do), the multiplier effects are the highest. Fiscal Money will mobilize unutilized resources, accelerate investments and induce banks to resume lending.
The downside is nearly nil. Even if Italy were to lessen its fiscal discipline and decide to over-issue Fiscal Money, only its recipients would take the hit; the value of dual currency would fall but the value of the euro would be unaffected. Nor would there be default risk on a default-free instrument.
In any case, the large cover ratio would make this scenario totally unlikely. Besides, it is only fair to remember that Italy’s inability to rein in net public spending is a false myth. Between 1998-2017, Italy was the only eurozone country to never run a primary budget deficit (other than in 2009). If anything, Italy has suffered from excessive public budget restraint, which has led to its dramatic output decline.
Unlike Stiglitz’s conclusion, our proposal is fully consistent with the rules of the eurozone and might very well be a permanent set-up for the whole eurozone going forward.
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Biagio Bossone
Marco Cattaneo
Massimo Costa
Stefano Sylos Labini
Members of the Group of Fiscal Money
Milan, Italy
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