Monday, June 11, 2018

"Talks of parallel currency are not new in Italy. But one of the proposals – the so called mini-BOT – has made it into the government contract that underpins the current League-M5S coalition"

From Bruegel:

The Italian mini-BOT debate
In the Italian context, Bossone and Cattaneo proposed in 2016 the “Tax Credit Certificate” (TCC), which they equated to a “helicopter tax credit”. Much as helicopter money is evocatively distributed across the economy for free, TCCs as helicopter bonds would be assigned free of charge by the government to households and enterprises. Bossone and Cattaneo argue that the Tax Credit Certificate system is projected to accelerate Italy’s recovery and will likely be sustainable. It also provides a tool to avoid the breakup of the Eurosystem and its potentially disruptive consequences.
Amato, Fantacci, Papadimitriou and Zezza proposed in 2016 introducing a parallel electronic currency called “geuro”. They argue that in the short and medium term, the “geuro” would foster demand, growth, and employment. In the long run, the parallel currency could transform the euro into a “common clearing currency” while the “geuro” would be used for payment between private agents. As long as the government could keep the credibility of the new currency, prices in euro or in a new currency would have no reason to differ.

Views on mini-BOT
Francesco Papadia and Alexander Roth have a good summary of the features of mini-BOT. They write that the economic evaluation of mini-BOT very much depends on its specific characteristics. Overall it appears to be a blend of an inferior security and inferior money. If mini-BOT would allow an increase of the budget deficit, they should be evaluated as fiscal expansions, not just as a technical change in the funding of a given deficit.

More important than their specific characteristics would be the message that mini-BOT would send about Ital-exit. Inevitably, given what the League and its representatives have said and written, mini-BOT would be seen as a first step in the exit of Italy from the euro, reinforcing denomination risk attached to Italian securities and thus increasing their yield, even if eventually Ital-exit and its huge negative effects were avoided. The mini-BOT would not break any EU or Italian law if they were just a security, but would be inconsistent with the existing European legal framework if they would become a parallel currency.

The Central Bank of Italy published a note (in Italian) on fiscal currencies. In it, they clarify that the instrument would have no value as legal tender, being in violation of Art. 128 TFEU and Reg. EC/974/98 (art. 2, 10, 11). This “currency” would thus only serve the purpose of storing value, and in that it would be very similar to a government bond. Based on current legislation, it could be used as a means of payment only with creditors’ consent. If the State instead decided to unilaterally get rid of its debt by settling them in a currency different from the legal tender, this would violate EU law and have negative reputational consequences....