Nobel Prize-winning economist Joseph Stiglitz believes that the best way for Italy to regain control of its monetary policy would be to issue a parallel currency.
However, Stiglitz warns of a downside. If Italy should issue a parallel currency in Italy, it would violate the rules of the Eurozone. It may even undermine the principles on which the Eurozone stands for.
They believe otherwise.
The organization is called the Group of Fiscal Money. They have been actively promoting the introduction of a dual-currency system called “Fiscal Money”. A country exposes itself to great financial and economic risk when leaving the euro. However, their approach on developing Fiscal Money will allow Italy currency to thrive without violating any existing rule of the European Union (EU).
Under their proposal, the government will issue bonds that are negotiable and transferable. Two years from its issuance, bearers of these bonds can use them for the purpose of getting tax rebates.
For the reason that these bonds have claims to future fiscal savings, they would then have immediate value. As such, the bonds could be exchanged versus euros in financial markets.
The bonds would function like a parallel currency to the euro since it can be used to buy goods and services.
Fiscal Money would have many applications. For one, they can be used to supplement the income of employees. Second, Fiscal Money can be used to fund social spending programs as well as public investments. Finally, it can used to lower taxes on labour from enterprises.
The application of Fiscal Money may strengthen an economy by increasing domestic demand. This can happen because the effect would be similar to having a devaluation of the exchange rate. Likewise, its dampening effect on labour cost would help improve the competitiveness of businesses.
Overview of parallel currency
Overall, they expect that with a parallel currency, the output gap of Italy would be reduced without compromising its external balance. The output gap measures the difference between actual and potential Gross Domestic Product or GDP.
Because the issuer of the bonds would not be obligated to reimburse the instruments in cash, these Fiscal Money bonds will not be recognized as debts. This fact is covered under Eurostat rules.
Furthermore, the bonds will not be recorded as part of the budget until these have been applied to as tax rebates. Keep in mind that these bonds are categorized as non-payable tax assets. The bonds can only be applied for the purpose of getting tax rebates two years after they have been issued and when fiscal revenue has recovered.
They have confirmed their findings on the bonds’ debt-related issue from the perspectives of the accounting and legal disciplines. It should also be mentioned that under the Maastricht Treaty, non-inclusion of non-payable tax liabilities in a country’s calculations of public debt is largely a matter of substance, not form. This is because there is no risk of default in a non-payable liability. Remember, the issuer of the liability does not have the capacity for repayment.
Italy’s tax rebates
Their studies have shown that on a conservative basis, Italy’s tax rebates would hit euro 100 billion per year during the 2-year period. However, when you consider that Italy’s revenues may exceed more than euro 800 billion, its GDP growth would more than offset the total amount of tax rebates.
They also recommend instituting safeguards in place to make sure Italy’s use of Fiscal Money would still be fully compliant with fiscal rules established by the EU.
Among these safeguards would be adjustments in taxes or perhaps cuts in spending that would be implemented should the use of Fiscal Money contribute to fiscal underperformance. Additional releases of Fiscal Money would be issued to those who would be affected by the fiscal adjustment.
They remain confident that the high cover ratio, or the ratio of government gross receipts to tax rebates, would be more than enough to accommodate these safeguards.
Thus, the implementation of a Fiscal Money program would give Italy an instrument that could potentially address its problem on output gap on its own. Italy would have control of its monetary policy.
At the same time, the policy would not complicate existing European treaties or require financial transfers. Because the amount of public debt would be reduced in relation to DP, the Fiscal Money program would adhere to the EU’s fiscal goals as described in the Maastricht Treaty.
By no means is the Fiscal Money proposal their Philosopher’s Stone. However, an economy that has a considerable slack in resources will benefit from the program’s multiplier effect which has a direct impact on output and only slightly on price. Furthermore, the multiplier effect will be optimized assuming external leakages are kept under control.
Under a monetary policy of Fiscal Money, underused resources will be activated, investments will be accelerated, and banks will be more encouraged to lend.
Is there a downside? The risk is very minimal. What would happen if Italy decides to over-issue Fiscal Money? Only the recipients of the bonds would be affected. Yes, the value of the dual currency would take a hit. However, the euro will not be affected. Likewise, there will no risk of default.
The possibility of having a large cover ratio would reduce the likelihood of this scenario to happen. It is not true that Italy cannot bring in net public spending. If you would revisit history, from 1998 to 2017, Italy was the only member of the Eurozone which did not experience a primary budget deficit. In perspective, Italy went through massive public budget restraint which resulted in a significant decline in output.
They are confident of their proposal and they feel that it could even be applied to the benefit of the entire Eurozone.