Fiscal money: a threat or an opportunity for the Eurozone: the case of Italian "mini-bot's"

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Institute of social science

Russian academy of national economy and public administration under the president of the Russian federation, Moscow

Fiscal money: a threat or an opportunity for the Eurozone: the case of Italian “mini-bot's”

Ligorio Vincenzo

PhD in Politics, Associate Professor

(Russian Federation)

Аннотация

financial money instrument eurozone

После того, как было сделано много попыток столкнуться с текущими и продолжающимися экономическими кризисами в еврозоне, в настоящем документе обсуждается возможность принятия инструмента, известного как финансовые деньги, для восстановления финансового пространства в этих странах Еврозоны, таких как Италия и др. которые столкнулись с долгим периодом строгой экономии, введенной властями ЕС. Следующее предложение в виде сертификатов налогового кредита было бы альтернативой этим мерам, чтобы вновь стимулировать рост и столкнуться с социально-политической проблемой недовольства ценностями Европейского фонда, а также избежать краха Еврозоны.

Ключевые слова: Еврозона, евро-валюта, строгость, ВВП, государственный долг, Европейский союз, Сертификат налогового кредита.

Abstract

Since the financial first and economic crises then occurred all around the European Continent, few concrete action have been taken in order to restore the economy especially in those countries of the Eurozone more affected by the endemic problems of low GDP grow and high public debt - such as Italy et al. This paper discusses the current Italian proposal - political - of adopting a “parallel currency” with its potential all upcoming risks of a bad presented proposal and the possibility to design a better option known as “fiscal money”, Tax Credit Certificates in order to re-boost growth and face current social crises direct consequence of economic crises and that is feeding those Anti- Europe/ nationalist parties around the Europe.

Keywords: eurozone, euro-currency, austerity, GDP, public debt, European Union, Tax Credit Certificate, mini BOTs.

Introduction

Today many are the threats which Europe has to face and fight against in order to do not destroy a project which lead - since the end of the WWII - our continent to be a place of peace and prosperity.

Indeed if we consider all the challenges which undermine the European implant, such as the great recession, Brexit, migration crises and others, we easily see how they reinforce populisms across the old continent thus diminishing fidelity and trust on both European institutions and Europe as philosophical idea. Last May elections gave us a puzzled picture with a not certain majority and a single option of governability of the Parliament and Commissioners nomination, a coalition between the Socialist party and the PPE.

In this paper we will focus on the current economic policy path followed by some Eurozone (EZ) countries (see Italy), which will undermine - not only according our modest opinion - the rules of the common currency area established in Europe, the European monetary union (EMU), originally based on the 1992 Maastricht Treaty and its further updates.

Eurozone architecture

To understand the faulty of a common currency area we have to investigate under whose assumptions had been sketch up.

The EMU architecture was based on two untable assumptions.

The first was the belief in a complete likely transition from simple agreement among few countries to the project - as dreamed by Europe's founding fathers - of the “United States of Europe” which would allowed a great number of “Europeans” to benefit of common rights. Despite many stages had been accomplished, this process had been stopped by a premature proposal for a European Constitution that albeit had received a wide approval being ratified by many member States, it was dramatically rejected through referendums by French and Dutch citizens, practically precluding any other future attempt to found those United States of Europe.

The second assumption on which Maastricht's was based is that liberal economic dogma which assert that markets will self-adjust toward full employment, central bank should focus only on price stability and be fully independent from governments. Just the fiscal policy is left under the national governments control albeit being subject to external control - The Commission- and nevertheless addressing their domestic fiscal policy each country is force to strictly follow Treaties' guideline if they do not want to risk Commission's warning letters - first - and an infringement procedure then.

Such logic - strongly wanted by Germany - shaped the European Central Bank structure, avoiding the main risk perceived in Frankfurt (Bundenskank side), to act as lender of last resort to governments. Further it is under this dogma that had been settled limits on deficit and governments debt, regulated in the Maastricht Treaty [12] first and in the six Pack then.

It became quite clear that the adoption of a single currency - with consequent renunciation of national authorities in having any opportunity to influence or change monetary policy - would imply divergences among Member States in managing crises created by asymmetric shocks, natural consequence of Maastricht framework [8].

Despite a fiscal transfer mechanism had been established - see the structural funds and the cohesion fund - in order to stimulate the growth in those regions lagging behind, this result-ed quite insufficient in order to be considered an effective automatic stabiliser. The EU's budget represents only the 1% of EU's GDP meanwhile in the United States we have a budget of 20% of total US GdP.

The Euro's defecitive structure was well known even before its implementation as Goldey wrote: “... if all these functions are renounced by individual governments they simply have top be taken on by other authority. The incredible lacuna in the Maastricht program is that, while it contains a blueprint for the establishment and modus operandi of an independent central bank, there is no blueprint whatever of the analogue, in community terms, of a central government” [7].

The adoption of a common currency as the Euro had not only a negative impact, indeed it granted some benefits to the behind lagging member states of the EZ, despite this today we see that its deficient architecture is leading a descending parabola which slowly is undermining the confidence toward Europe as a “common house”.

The adoption of the euro as single currency in tandem with a single monetary policy had two implications. Firstly the advantage of obtaining reserves from the EBC at the same discount rate for each domestic country had the effect of mitigating volatility of interest rate in the periphery countries of the EZ. To be more precise since the Euro was adopted till the beginning of the great recession we saw a substantial reduction of the interest rate of countries such as Portugal, Italy, Greece and Spain whose rates converged toward German's [14].

The second major implication is that adopting a single currency eliminate any possibility of exchange rate adjustments by domestic authorities. So that the value of the single currency - in our case the euro - against other currencies depend on the aggregate price competitiveness of the common currency area, Eurozone, as well as on financial markets. On this point we can say that since the euro was introduced we experienced an important lift of spread between long-term interest rates between the EZ and US, confirming the fact that during the period 2000-2007 - before the begin of financial crisis - financial speculation on the exchange markets did not played a relevant role.

Furthermore, small differences in inflation among the common currency area based on relative price competitiveness created a situation where countries as Italy and Greece historically with an high inflation rate had in the euro a strong currency and on the other hand made the euro a weak currency for such countries that experienced in that period an inflation rate below the currency union average, among all Germany.

As shown in the annex 1, this process allowed countries such as Ireland, Spain and Greece to close their gap with Germany in the period considered above, in term of rates of growth of their real GDP per-capita. On the other hand in the same time Germany introduced measures as labor market reforms which cause a decrease of unemployment rate, strong wage moderation and enhance price competitiveness, policies that failed to stimulate domestic demand labeling Germany as “sick of Europe” due to its experience of low growth rate [6].

The combination of faster growth and enhance price competitiveness in the peripheral regions relative to core one, had a deep impact on current account balances relative to GDP, with negative effect for countries in surplus like Italy but with more harmful effect on Greece. The latter adopted the euro with a large current account deficit relative to GDP which open the door to a predictable increase net foreign debt position. A combination of relatively faster growth and price competitiveness decrease worsen the situation.

Regarding trade imbalances, yet, are more evident if we focus our attention on the trade of peripheral regions with the core regions. The result of the adoption of the euro in Greece, Spain, Italy and France turned the balance of trade into a deficit. The accumulation of private debt in those countries - which funded trade imbalances - had a mirror effect in the EZ inasmuch were credit in countries such as Germany but not only.

Then when the Great Recession hit with its bubbles the real estate/housing markets in countries as Ireland, Spain and Greece it turned to be very disruptive for EZ banks' balance sheets due to an high US toxic financial assets. In these countries governments were asked to intervene due to a systemic impossibility to restore growth and stability. In Ireland the government took the decision to move the burden of crisis from private to public debt bailing out banks in trouble.

In 2009 a new government took the office in Athens disavowing previous reports on both public deficit and debt, which resulted much more higher, causing an adverse response from financial markets as well as European institutions leading the country to a sovereign debt crisis.

The result of the Greek crisis - led by Papandreou's decision to ask additional liquidity to the as called Troika - alerted markets that Frankfurt would never be a lender of last resort even in case of high default risk of a member State. Consequently became evident that the common currency - Euro- had the status of foreign currency when repaying debt held by non-residents [3].

Another implication was that the growing spread in interest rates of other EZ member States - see not only Greek but also Italian vs. German - was basically due to the impossibility for the EZ's governments to use their monetary policy.

As already remarked in another paper 5], the belief that fiscal austerity was more likely that an increase of taxation, it was backed by the theories that stated due to fiscal multiplier close to zero if not negative, any public expenditures cut would not result in significant GDP drop. The reality showed another scenario with larger fiscal multipliers registering the regrets of Troika's economists.

Indeed the EZ's periphery member main problem is not the size of whole public debts but rather those debts - public and private - held abroad, fiscal austerity in tandem with labor market reforms (substantial cut of nominal wages), “is thought to be an effective short-term solution in order to make debts sustainable, thereby increasing price competitiveness ” [4].

If the austerity is adopted as a tool in order to boost growth through a substantial increase of net exports, this would not result effective in those example of trade agreement situation such as EU and in the specific the EZ because if wages and process are falling among all union member states, nobody will benefit of a relative advantage. This constitutes a situation where all the players lose (lose -lose), and where improvements are seen just in few countries in trade with external partners.

At the time of writing, we can still see that the major concern of EZ's and EU's institutions seems to be the strengthening of balance sheets of EZ's banks and the introduction of QE's policy with scarce results in those periphery States.

Italy's parallel currency proposal real risk or bad alternative.

Since a no-conventional government coalition have been formed in Italy by the Five Stars Movement and The League, ideologically far from each other but tied to an as called “ governability contract”, a very important question/issue have been raised between the investors, EU's members and experts: is Rome intentioned to leave the Eurozone?

This question of course lead to a “Pandora's box' of other questions connected with the future of the euro as common currency; Italy is the third economy in the continent with the biggest public debt in absolute terms and slow - when not negative - GDP growth rate.

Despite the government coalition excluded any reference to a possible “ital.-exit” in their agreement, but since both the political parties toyed with the populist idea of a return to the Lira during the elections' campaign, all the interested parties - first of all domestic and foreign investors - are dubious about their real intentions.

What above with the parliamentary motion on arrears payments to commercial businesses - passed in the beginning of June - by the lower chamber, has caused such an uproar.

This motion, invited the government to consider issuing small denomination bonds ( mini-BOTs according Italian denomination), in order to speed up its settling of debts; all the political parties, included oppositions such as Forza Italia and the Democratic Party voted in favor of such proposal. We would underline that such motions are usually symbolic and that not always are implemented by the government so we should not get carried away by the idea that this would represent a credible attempt to create an alternative - domestic - to the Euro. In the specific this proposal was even poorly specified, indeed we could not fully understand if these securities would be used as medium of exchange - as wished by Italy's euroskeptics.

To provide a full understanding about the discussion between both the ruling parties, their proposal is focused on the idea of as called “mini-BOT”. the BOT according Italian denominations is a Treasury Bill and it serves as a kind of cash equivalent in electronic trading; the mini-BOT then would be a government debt instrument in paper from - of small value - that pays zero interest and never matures. This would be used by government to pay social benefits and to receive tax payments. Private businesses should not be forced to accept them but they could.

According the preliminary scheme discussed between the government political forces, individuals and businesses would have theoretically the possibility to buy this treasury bill as a way to pay their taxes, but at a discount - selling them for euros with an haircut of 510%, settling de facto an arbitrage for traders.

A part from the economic debate around this proposal, many critics and discussions are raised due the political nature of the Italian government where as already mentioned above we find euroskeptics and populist whose - especially from the League - are increasing the arguing level with the European Commission regarding the increase of balance deficit and the consequently warning letter received from Brussels.

We believe as already occurred in 2015 in Greece with a similar proposal of professor Yanis Varoufakis - on that time Greek minister of Finance - that the prejudice(s) is based more on political believes than economical.[5]

Indeed within the Italian government we can find a voice in disappointment, the minister of finance, professor Tria, who is filling his post as technical minister differently from his political colleagues and who de facto have to negotiate with the European “hawks” in order to do not risk a fine of 3.9bn euros, direct consequence of the infringement of EU's recommendations.

The following proposal as described in our previous paper [6] is far to have a political allocation, both for the biographic background of the author and for the scientific reason that led us to investigate such theme.

What we are going to propose it wants to be an universal instrument that to be effective and work without represent a threat for the European currency union should be adopted by those countries that are still facing structural problem in term of growth.

As said in the introduction and in our previous analysis on the Troika Austerity, all the action putted on the table by the European Institutions, such as draconian reforms, prolonged QEs without additional parallel measures et al., will not lead to a final recover of the European economies.

The political instability at international level, uncertain future due to trade war and lack of rationality - as always it was - in the financial system let us to think - but not to predict - that the risk of a new global economic crises is waiting behind the door.

Parallel currency or fiscal money: domestic instrument to exit the crisis.

The figure that we see in Europe is of a depressed economy with a low inflation with an urgent need to boost demand, and with a common currency that exacerbates problem of adjustments. A depressed economy as the European would need a fiscal expansion that at current moment is not feasible due to a political veto. An alternative to fiscal policy is generally the as called “helicopter drops” which had been adopted by the ECB with scarce results inasmuch the money “parachuted” did not reach the soil but stopped at bank level.

In order to facilitate a real boost of aggregate demand, grow and unemployment rate drop, periphery States could adopt the instrument of “fiscal money”.

The fiscal money tool will take form of Tax Credit Certificates (TCC) and or Tax- Backed Bonds (TBB) issued by Eurozone's crisis hitted member states to be used as quasi money. Both TCC and TBB would be complementary to the euro - often such solution is known as complementary currency - which as the power to boost domestic spending without generate additional debt. Being not a “legal tender” from the beginning as well as not being convertible by government into legal tender the fiscal money in the form described above will not break the absolute monopoly of money issuing hold by ECB. However both TCCs and TBBs could be tradable, negotiable or transferable to third parties as well as exchangeable in the market at discount or at par.

These certificates would allow holders to reduce their levies after two years from issuance. The referral of two years is due to the necessity to stimulate output grow through by the income multiplier effect and thereby avoiding for the government the balance deficit that TCC would cause in absence of other additional revenues. Indeed as explained above, TCC would trade for euros that could be immediately spent for current needs of holder such as pensioners, households and employees.

A Eurozone member state would start issuing TCC in order of 2% of GDP and assign them - free of charge - to enterprises in order to reduce their gross labor costs, employees and low-income households in order to increase their after-tax incomes and to fund or cofund social expenditures or public investments. [10]

Assigning such certificated of credit to liquidity-constraint subjects whom generally have an high propensity to consume such assignments would a great instrument to support consumption and consequently production. Furthermore the reduction of gross labor costs for employers would improve external competitiveness with particular focus on those sectors export oriented. Indeed TCC would have a similar effect of currency devaluation without carries its risks.

One of the main objection which we can find is that regarding the increase of budget's deficit.

According the European System of Accounts 2010 (ESA) issuing certificates such as TCC does neither create a financial asset nor a financial liability since there is no an obligation biding a debtor to a creditor. TCC represents on the time of issuing just a contingent liability which should not be recorded in national accounts. Only when they will effectively used to pay tax less taxes they would be recorded in national account, which would occur in occur proposal only after two year of issuing. Thus we can easily affirm that TCC does not raise the national budget deficit on the issuing date.

Excluded the deficit's risk, even in a conservative assumption with a fiscal multiplier close to 0.8 a fiscal money program as TCC would prime a recovery trend - in term of GDP growth - not increasing the public debt / GDP ratio on the other hand. Under the assumption of a multiplier higher than 1 (1.1-1.2), would have affect positively the above ratio, as real GDP recovers and nominal GDP benefit from some inflation increase.

A government may adopt “safeguard clauses” in order to fully guarantee that in any case no increase of public debt would take place by TCC issuing.

The TCC program could also include additional flexibility tools in order to guarantee a constant decrease of debt/GDP ratio. One would be to postpone the use of maturing TCC for tax rebates in exchange of an increase of their value.

Despite timid improvements in some countries of the Eurozone a massive therapy is strongly needed if we want to jumpstart growth as well as if governments want to launch a signal to citizens and turn to growth expectation from stagnation one.

Radical reforms and structural are needed in many peripheral countries but those will not turn on a short-term mechanism of positive growth if not accompanied with other tools such as TCC and or similar.

References / Список литературы

1. Spinelli A., Rossi E. The Ventotene Manifesto; The Altero Spinelli Institute for Federalist Studies: Ventotene. Italy, 1941. Pp. 75-96.

2. Bossone B., Cattaneo L. et al. “Free fiscal money: revisiting austerity without breaking the euro”. Associazione Paolo Sylos Labini. 26 November, 2014.

3. Cesarotto S. Controversial and novel features of the Eurozone crisis as a balance of payment crisis. In Post-Keynesian Views of the Crisis and its Remedies; Dejuan O., Febrero E., Uxo J., Eds.; Routledge: Oxon, UK, 2013. Pp. 111-129.

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8. Engbom N., Detriagiache E., Raei F. The German Laubour Market Reforms and PostUnemployment Earnings; IMF working paper WP/15/162; International Monetary Fund: Washington DC, USA. July, 2015.

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13. Meyer D. A concept of the euro as a parallel currency - A gradual solution for the eurozone's problems. Cap. Mark. Law J., 2015. 10. 390-409 [CrossRef].

14. [Electronic Resource]. URL: http://ec.europa.eu/eurostat/documents/3859598/5925693/ KS-02-13-269-EN.PDF / (date of access: 21.06.2019).

15. [Electronic Resource]. URL: https://europa.eu/europeanunion/sites/europaeu/files/docs/b ody/treaty_on_european_union_en.pdf / (date of access: 21.06.2019).

16. [Electronic Resource]. URL: https://data.oecd.org/interest/long-term-interest-rates.htm/ (date of access: 21.06.2019).

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