Italy against the EU – can a parallel currency help?

The EU is just about to start infringement procedures against Italy because the new 2019 government budget does not meet with its approval. Instead of adhering to the deficit of 0.8% of GDP of the old government, the new government wants to spend about 2.4% as government deficit.

(For reference 2017 Italian GDP was Euro 1,725bn. Its deficit Euro 41bn. And government debt Euro 2,263bn.)

This additional deficit of Euro 30bn is due to

 

a) reversing planned indirect tax rises (0.7% GDP, Euro 12 bn)
b) a Citizen’s Income of Euro780/month minimum (0.4% of GDP, 7bn)
c) Early retirement programme (0.4% of GDP, 7bn)
d) public investment (0.2% of GDP, 3.5bn).

 

Does parallel currency count as debt?

 

If the Italian government were to finance all this extra expenditure through a parallel currency, the Central Bank of Italy would count this parallel currency as part of Italy’s indebtedness (as are bank notes), as it could be used to pay taxes. Italy would still fall foul of the rules set out by the EU to reduce its indebtedness.
However, others argue if a parallel currency could only be used to pay taxes in 2 years time from now, it does not count as debt straight away, but counts only as extra debt in two years time.

 

Purely to strengthen its negotiating position against the EU, and to demonstrate to credit markets that it is not dependent on them and “market” interest rates for its borrowing Italy should introduce a parallel currency to pay for this small increase of government deficit. It would also demonstrate to the EU and Italian electorate that an elected government is still in charge of its finances, even though presumably a potential fine could still be levied on Italy by the EU.

But the main story will be the new parallel currency, and not the non-adherence to EU rules. (However, as a net contributor to the EU, Italy pays part of its budget, and I would be surprised if there were a fine).

Italians will have their own plans on how to introduce a parallel currency, but to make it successful it has to be universal (everybody Italian should be issued with some of the new parallel currency) and it has to issued at a rate of 1:1 to the Euro.

It has to be electronic, as on a debit card, and run centrally, by the central bank, with whom every Italian citizen would have an account.

Not every shop or retailer has to accept the new parallel currency (it is not official legal tender), it is entirely voluntary. However, it can be used to pay taxes to the government, and therefore will be used by the majority of retailers.

Retailers which would have smaller tax liabilities than expected parallel currency takings could sell the parallel currency back to the government (at perhaps 90 cents to the Euro). The government could then sell the parallel currency back to others (at perhaps 95 cents to the Euro) who still have taxes to pay, but do not have any parallel currency earnings.

To introduce Euro 30 bn of parallel currency to finance its additional budget plans the Italian government should therefore do the following

a) Issue each month Parallel Currency 17 to each Italian into their new parallel currency account. This would add up to exactly Parallel Currency 12bn, (or about 200 a year to each Italian) and counteract the Euro 12bn parallel indirect tax increase. So the government introduces Euro 12bn of taxes, but pays everyone Parallel Currency 12bn as well.

Once these small amounts of parallel currency are available to ALL Italians, and shops accept them it is of course possible to pay people and government expenditure in them.

So next the government could finance

b) its citizens’ income programme (Parallel Currency 7bn)
c) its early retirement programme (Parallel Currency 7bn), and
d) additional public investment programme (Parallel Currency 3.5bn).

 

It is absolutely crucial that first (a) is enacted, a universal payment to each Italian. Only afterwards will a parallel currency be widely accepted, and only then can make payments in parallel currency for (b), (c) and (d) any sense.

Altogether only 30bn of government expenditure would be issued in parallel currency by the Italian state . Altogether it will spend more than Euro 800bn in 2019. So it would be a tiny amount of total government expenditure. Its economic effect will be very similar to spending the same amount in Euro.

However, once a parallel currency is issued the options for fiscal and monetary policy will very much sit with an elected government in Italy and not with a bureaucratic civil service working for the EU. EU policies have so far demonstrated over the last few years that its fiscal discipline rules leave huge chunks of the EU population unemployed. A parallel currency in addition to the Euro, issued by a country with high unemployment, could be the start to reverse this wasteful adherence to non-sensical policies.