domenica 16 novembre 2014

Solving the economic depression in the eurozone by issuing “quasi” monies


Biagio Bossone, Marco Cattaneo, Luciano Gallino, Enrico Grazzini, Stefano Sylos Labini


We propose that the governments of the crisis-hit countries of the Eurozone stimulate internal demand by issuing and allocating Tax Credit Certificates (TCC) and Tax-Backed Bonds (TBB) to be used as quasi monies. As state-issued monetary instruments, these bonds and certificates would be complementary to the euro and add to the domestic spending power without generating new debt. Our proposal is consistent with the existing rules and limitations under the Eurosystem and European institutions.


The crisis of the Eurosystem


Even prior to the creation of the euro, several highly reputed economists had noted that a European single currency for economies featuring different competitiveness, productivity levels, and inflation dynamics would hardly serve as an engine of growth for all countries in the area in the absence of strong policy cooperation at the European level. Regrettably, their predictions have become reality.


The single currency system divides the European countries, rather than linking them together. Since the breakout of the global financial crisis in 2007-08, the single currency has acted more as a brake to the growth of the Eurozone and its individual member countries than as a catalyst for regional development. With a fixed exchange rate, and absent a regional fiscal policy as well as other adjustment mechanisms capable to absorb idiosyncratic shocks, the single currency has proved inadequate to match the growth needs of each member country. Intra-regional trade and financial imbalances and high and still rising public debt have been the necessary consequences.


Due to the intrinsic rigidities of the single currency, creditor countries – especially Germany – defend the adoption of contractionary policies by debtor countries such as Italy, France and Spain as well as other countries of Southern Europe. In order to ensure full recovery of their credits, the former have imposed austerity measures on the latter, including drastic labor cost cuts, severe reductions of welfare entitlements, and punitive tax hikes. Public debts denominated in a currency that individual countries do not control autonomously – and which de facto represents a foreign currency for them – force governments to undertake pro-cyclical policies. And the economies that are less competitive enter a crisis spiral, inevitably dragging along the so-called “virtuous” countries as well. Instead of facilitating convergence among the 18 Eurozone members, the euro exacerbates their differences and exasperates the reasons for conflict.


The Eurozone, and especially the Mediterranean countries, find themselves in a dramatic situation: either their economies stagnate or, worse, they fall into depression as consumption and investment (both public and private) progressively shrink. The ECB tries to give oxygen to the monetary system, yet banks throughout the area hold liquidity and refrain from lending it to the economy, most notably small and medium size enterprises. Unemployment and job precariousness grow spectacularly as a result, and territorial and social disparities widen.


It seems like Europe has forgotten its founding objectives of full employment, sustainable development, and well being for all its citizens: rather, the official priority of the EU institutions aims exclusively at improving the external competitiveness of each country via austerity measures and “structural reforms”. However, addressing competitiveness through structural reforms takes long and requires resources. Also, austerity has proven to be a total failing and has run even counter to the very objectives it was intended to pursue: it is not just a coincidence that, under austerity, public debts in the most vulnerable economies have kept growing bigger. The attempt to apply the Fiscal Compact, with additional doses of fiscal adjustment every year for many years to come, would make things even worse.


The crisis is jeopardizing the survival of any integration design. The European economy is sick and risks to infect the world economy. Proposals to mutualize debts (through the so called “Eurobonds”) or to create a federal fund to alleviate the social costs of the crisis appear to be politically unfeasible, due to the firm opposition from Northern European countries. In such a bleak context, different scenarios are possible: the continuation of a prolonged phase of stagnation or even recession and depression; the restructuring of the debts of the Mediterranean countries; or the disorderly breakup of the Eurozone, with some countries being forced to exit the monetary union and the ruinous fall of the Eurosystem following suit.


Given the circumstances, it is highly unlikely that negotiating wider margins of fiscal flexibility with Brussels and Berlin would be sufficient for the crisis-hit countries to revamp domestic demand, since this would not address the real issues affecting the Eurozone. Besides, for countries like Italy, greater flexibility, even if granted, would imply even larger levels of indebtedness.


A number of economists propose abandoning the single currency as a way for crisis-hit economies to avoid being further subjected to penalizing conditions. Yet returning from the euro to domestic currencies would be far more problematic than exiting a semi-fixed exchange rate system (such as the old European Monetary System). A disorderly breakup of the euro – the second world reserve currency – would likely produce economic and geopolitical shocks of incalculable consequences.


How then to resolve such an ominous crisis that Europe has inflicted upon herself? It is by now clear that the founding treaties of the Eurosystem will have to be revised radically, but this requires political will and time, neither of which is currently available. Facing the crisis requires that, even within the context of the euro, every national state urgently take sovereign initiatives to revitalize domestic demand, output and employment. Unlike the unelected EU executive bodies, the democratically elected governments of the European countries have the right and the obligation to make the future of their citizens a better one and to implement courageous reforms to preserve the prosperity of their national communities. Citizens rightly expect their elected governments to enact growth-enhancing nationally-oriented policy measures without being imposed excessive and unjustifiable constraints by other countries and without asking for concessions.



The Tax Credit Certificate Proposal


Urgent and effective measures are necessary. Our proposal features a feasible alternative option to other solutions that appear to be more complex and less practicable.


We propose that the crisis-hit countries of the Eurozone issue deferred Tax Credit Certificates and allocate them at no charge to employed, self-employed and unemployed workers as well as to enterprises. After two years from their issuance, the TCC would be used to pay all financial obligations to public administrations (taxes, social contributions, fines, etc.). Governments would issue TCC in the order of 5% of GDP for the first year and would increase their issuance in subsequent years, if necessary, up to an annual ceiling of 10% of GDP and until recovery in output and employment is observed.


The TCC solution is legally sound and uncontestable at the EU level and from the European monetary authorities: while the ECB is the exclusive issuer of the euro, each sovereign state retains the legal right to offer fiscal rebates, such as the TCC. Moreover, while the ECB has the monopoly over the single currency, it does not exercise control over the creation of “quasi” money instruments (such as, for instance bank deposits, government bonds, etc.). As the TCC is a financial instrument with a “quasi” monetary nature (it is a non-debt store of value that can be transformed into legal tender), it would not be subject to the ECB monopoly.


The new instrument issued by the state for the purpose of lowering the fiscal burden would directly flow into the pockets of people without raising new debt. TCC issuance would counteract the austerity imposed by the EU and resolve the liquidity scarcity problem that is currently affecting the economy of the weakest countries in the Eurozone, which the banking system has proven unable to address: while largely refinanced by the ECB, banks have mostly invested the new funds available in financial assets while continuing to limit the extension of credit to the real economy.


Based on its nature of legal tender to settle obligations to the state, the TCC would be exchanged for euros in the financial market similarly to any zero-coupon government bond. It could also be accepted as a means of payment (to be used, for instance, in combination with credit or debit cards). The TCC would become a new financial product, which the state would commit to issuing on a permanent basis. Additional amounts of TCC issues would vary over time depending on the economy’s response. This would contribute to improving expectations and would induce people to consume a large share of their TCC-generated income. A virtuous circle would emerge with multiplier effects on demand and output.


The advantages of the new quasi-money


Large and persistent allocations of TCC would stimulate demand and help close the output gap, while having a limited effect on inflation and yet countering the risk of chronic deflation and reducing public debt burdens.


As a result of the income multiplier effect, the fiscal revenue shortfalls caused by the TCC deferred tax rebates would be offset by the increased fiscal revenues driven by GDP growth. In fact, with the current real resource slack and interest rates close to zero, the income multiplier would be greater than one*. GDP and employment would grow rapidly.


As a consequence of revived growth, state budget deficits would be reduced and public debts would become better sustainable. Moreover, the share of TCC allocated to enterprises in proportion to their labor cost would drastically lower production costs. This would replicate the effects of currency devaluation: it would trigger export growth and offset the impact that the resumption of GDP growth would have on the trade balance via larger imports.


Taking Italy as an example, assume that over 2015-16 a TCC issue of €70bn is allocated to employees in inverse proportion to their taxable income, and that €80bn are similarly allocated to private-sector employers. The latter allocation would cut labor cost by 18%, broadly equivalent to Italy’s competitiveness gap vis-à-vis Germany. Some additional €50bn TCC could be used further stimulate demand, for instance, through new public investment, guaranteed income schemes, support to private-sector initiatives in depressed areas, and the like. The idea would be to give preference to easy-to-implement social utility projects.  


At operating speed, an annual issuance of €200bn could be effected, which would bring the stock of circulating TCC to €400bn (taking into account the annual reflow of deferred TCC used to pay taxes). This amount would compare to Italy’s total fiscal revenues of €800bn. Assuming an income multiplier of 1.3*, GDP would recover by 15% over three years, with a 5-point drop in unemployment, and the trade balance holding in substantial equilibrium. The public deficit – defined as the difference between fiscal revenues and expenditures in euros – would be reduced to zero already from end-2015, and public debt would start falling in percent of GDP.


Exiting the debt trap with the Tax-Backed Bonds


While the TCC would allow an economy to exit the “liquidity trap”, largely indebted countries also need to escape the “debt trap”. From the 1980s onwards, and certainly in preparation for the entry in the monetary union, central banks in many European countries have stopped issuing money to purchase public debt obligations in the primary market. Public deficits could only be covered through new debt issuances, and interest rates started to rise as a result. Attracted by high returns, institutional investors absorbed an increasing share of the new debts. Eventually, the corresponding debt burdens subjected taxpayers to increasing levels of fiscal pressure, which in some cases has become unsustainable. Reducing such pressure is now a priority, but this should not be achieved at the expense of social welfare, especially where this is already lower than EU average. The objective must be one of reducing the outstanding debt and the interest payments on it.


In this regard, a major obstacle is that public debts in largely indebted Eurozone countries are denominated in a currency that the individual countries neither issue nor control. This exposes them to high real rates of interest and to speculative behavior from investors, especially international ones, who are most reactive to negative outlooks and ready to download their debt holdings or to demand higher premia. The public debts denominated in euro must thus be reduced rapidly and, where feasible, they should be “nationalized”.


To this purpose, in addition to introducing TCC, governments should refinance their maturing debt obligations with Tax-Backed Bonds (TBB), which (like the TCC) would not be reimbursed at maturity with euro but would be accepted by the state for tax payments.    In practice, a public debt-swap offer could be launched at the same time that TCC are issued whereby every government bond  would be exchanged for a TBB carrying a longer maturity and a premium on the original bond’s interest rate. The debt-swap option would remain open for all the residual life of the outstanding public debt. The premium on rates is intended to cause a large proportion of the existing debt to be tendered, notwithstanding the longer maturity. It should be noticed that TBB could be more attractive than “traditional” bonds regardless of the premium, as no default risk is associated with them.


This conversion would i) prevent market turbulences from affecting bond prices, and ii) reduce the level of the “real” public debt (that is, debt obligations to be repaid in euro), transforming it in “national deferred money”. Such process would amount to “renationalizing” the debt; it would substantially reduce the risk of default on sovereign debts, and would make the financial stability of largely indebted countries less dependent on the erratic mood of international capital markets.


The TBB will become increasingly attractive as the supply of traditional government bonds decreases. Italian institutional investors need a “domestic” liquidity management instrument, especially in view of an overall reduction in traditional bond offers. In particular, such entities as banks and insurance companies have large liquidity needs not just to pay their own taxes, but also to make payments of taxes and social contributions on behalf of their employees.




The proposed issuance of TCC and TBB does not involve default risk for the issuers: issuing governments commit to accepting them for tax payments, but are under no obligation to reimburse them at future dates.


The issuance of TCC aims at revamping demand, output and employment. The resulting recovery of GDP raises the fiscal revenues needed to compensate for the deferred tax rebates made possible by the TCC, and thus keeps euro expenses and incomes on balance. In turn, the TBB accelerate the reduction of gross public debt (to be reimbursed in euro) as a ratio of GDP ratio.


The possibility becomes real that the debt/GDP ratio may rapidly trend downward toward the 60% Fiscal Compact objective, which would otherwise remain totally unrealistic. The protraction of austerity measures would in fact condemn the weak economies of the Eurozone to permanent stagnation or depression, and inhibit the objective of debt consolidation.


We believe that the creation by sovereign states of quasi-money national instruments can provide weak countries with a feasible way out of economic depression. The economies of the Eurozone that have been hit by the crisis most badly may exit the tunnel of depression and debt by putting their own act together, without asking competitor countries to inflate their economies, worsen their trade balance, or provide financial aid.


Notwithstanding the difficulties that our proposal may raise, we believe it offers a concrete way out of the current dramatic situation avoiding traumatic solutions, which could inflict large losses to workers, savers, firms and financial institutions.


We believe that this can be the way to set up the best conditions for Europe to survive the current serious crisis and lay down the bases for a different monetary system, which would finally be stable, sustainable and conducive to economic well being and full employment.



* Note on the Income Multiplier


Recent studies (some of them reported below) provide a broad range of estimates of the income multiplier. Our proposal is based on the assumption that the income multiplier is greater than 1. Specifically, we have conservatively assumed a value of 1.3, based on a number of considerations:


  • The demand stimulus following the issuance of TCC would be intense and persistent; it would taper only when a strong response from output and employment would be observed
  • TCC would be allocated to individuals featuring a higher propensity to consume
  • Interest rates are low and will likely remain so due to the accommodative monetary policy stance from the ECB
  • Leakage effects from demand through the external channel (i.e., higher imports from abroad) would be offset by the export growth made possible by competitiveness gains following the reduction in labor costs
  • The negative impact that the issuances of TCC might have on the value of the multiplier if they were to cause higher interest rate spreads on public debt would be neutralized by the issuance of TBB, which would stabilize the price of debt.



Auerbach A and Y Gorodnichenko, Measuring the Output Responses to Fiscal Policies, American Economic Journal, 2012


Blanchard O and D Leigh, Growth Forecast Errors and Fiscal Multipliers, IMF, January 2013


Eggertsson G and P Krugman, Debt, Deleveraging and the Liquidity Trap, Quarterly Journal of Economica, 2012


Eichengreen B and K H O’Rourke, Gauging the Multiplier: Lessons from History, VoxEu, 23 October 2012


Locarno A, A Notarpietro and M Pisani, Sovereign Risk, Monetary Policy and Fiscal Multipliers: A Structural Model-Based Assessment, Temi di discussione N. 943, Banca d’Italia, November 2013

31 commenti:

  1. You can't blame the Euro currency for stagnation which deprives the economies of the Southern State of the Eurozone. If ECB is doing a lot of work, that means there are many others institutions which are not doing their commitments.

    If a Nation State want print its own money, you need to delocalize all the public expenditures toward the Private Sector. That's because you can't put an enormous power in one side of the society only. This is the balance you need to avoid the collapse of the entire system. Got that? We hope so.

    1. "If a Nation State want print its own money, you need to delocalize all the public expenditures toward the Private Sector": why ? there are 200+ countries in the world. Everybody outside the Eurozone prints its own currency. Everybody has a public sector. Almost everybody did much better, as concerns the economy, than the AVERAGE of the Eurozone from 1999 onwards...

    2. The vast majority of the Countries you're referring to are based on Free Market and not on State-Owner market. Would you like your Government allowed to print money? Then you got to liberate all the sectors of businesses owned by the State. Don't you like that? So, let the central banks do the strong job you're not able to do. So long.

    3. A NATIONAL central bank, targeting employment together with monetary stability. Not a FOREIGN central bank. And forbidding money-financed deficit spending when you have depression and deflation is crazy. Which is what happens today in the Eurozone.

    4. I'm afraid to say the the only crazy thing today is a society with no freedom and no market. Secondly, don't forget inflaction is a war. Think about it. Take care.

    5. Deflation is a much worse one... and it's today problem. You have to fight today's war, not the latest one.

    6. It's no coincidence that deflaction is coming to you. It's a little gift from the profligate Government of the past. Pay your debts and then you can do all the deficit spending you'll like to do. If not, banckruptucy is in front of you. Make your choice.

  2. Agree completely. But realise the system so that transactions may be executed via mobile phone.

    I have argued for a similar solution since 2010. This is my twist on this:

    Go for a solution that does not assume euro exit, but at the same time gives a national eurozone government the necessary fiscal tool to get the economy going: introduce a national parallel currency in crisis-ridden eurozone countries. (This corresponds to your Tax Credit Certificates.)

    This should be done fast and in a simple and very cheap way by letting this parallel currency be purely electronic, no bills and coins. Everyone gets a current account directly at the national central bank. The government spends this currency into the economy together with euros, and taxes both currencies back in the same proportion. The proportion could be 75% euros and 25% electronic national currency. Wages and pensions are paid in the same proportion. And firms will adjust and set prices and wages in similar proportions. Firms which do not accept the electronic national currency in purchases will be outcompeted by those which do accept such a share.

    The proposal is described in detail in a paper in this report, page 14:

    1. Thank you Trond ! BTW the concept of national currencies to be used proportionally alongside the euro, is included in the AfD (German eurosceptic party) proposal, although their idea is to have it for ALL transactions (private as well as governmental). See my 11.11.2014 post and link attached.

  3. Marco, prof. Bernd Lucke form the AfD gave a presentation at the 2012 Berlin parallel curency conference that the report I linked above is from. See page 49.

    I agree with the AfD in that a parallel nationally issued currency should be used also for private transactions. Even if it formally is "Tax Credit Certificates", that is perfectly possible. Especially if the TCC's are transacted via mobile phone. And they can reside as accounts in a server at the central bank.

    1. I'll go to check that immediately !

    2. The proposal of Trond Andresen is very interesting, Only a question: What is it possible to do to avoid that a parallel nationally issued currency might deteriorate the external equilibrium of less competitive economies of eurozone? A "Tax Credit Certificates" could reduce the labour's cost of firms in the peripherical economies of eurozone but this solution alterate the competion. What do you think?

    3. I don't think there is a distortion as concerns competition. So long as a country just brings its unit labor costs in line with competitors belonging to the monetary union, and keeps its external trade in balance, it actually is solving distortions, not creating ones.

    4. I can agree with you, but it is not the basic rule of European Union: each State's help is forbidden. With a flexibile approach, it's a common interest to improve the conditions of peripherical economies of eurozone, but this is not the prevaling way in Eurozone. An an other example, the stress test on the main banks in Europe: the banks with large credit exposition with sme are penalized in comparison with the banks with large financialization. Without a change in Eurozone it's impossible change anything.

    5. Reducing taxes on labor is not forbidden. Having said that, EU rules just have to change. Current ones - starting from the fiscal compact - are just unenforceable.

  4. Your proposal is about a run on the Euro. It's not reasonable. It's a default for southern contries. People don't want it and they did vote against it.

    1. No default on any debt, no forced conversion of any financial obligation.

    2. You can't promise anything in this world. Stop bragging.

    3. I can issue money and declare that I accept it. No bragging, it's just up to me...

    4. If people don't agree with you, you can't print anything.
      Get ready for another historical step toward democracy.

  5. There is no reason to fear a "panic", or a "run on the euro". Euro claims and savings will remain with the same safety as today. The whole point of a parallell currency is that it allows a financially non-dramatic injection of demand in a depressed economy that has a lot of spare capacity. You don't even need to have much of a market for euro/TCC exchange. Since the TCC can be used to settle tax obligations, there counting on a level with euros, they will not fall much below par, say to 0.95 or close to that. That is not a big problem.

    There is an elegant twist you can make to this system: asssume that government declares a general euro:TCC ratio, say 75:25. This ratio (from now on called the "ETR") is fairly fixed but can be changed incrementally just like the Central Bank adjusts the interest rate. This ratio is then an indicative parameter for how to set many of the economic relations in the economy. Govt employees and pensioners are paid in the ETR, with one TCC counting as one euro. Govt pays providers in the ETR. Providers who don't accept that don't get any sales. But providers and other firms will of course try to use the ETR when they pay their employees. But firms may have the freedom to offer employment at another ETR, higher or lower.

    For non-govt business, firms may sell their goods/services at the ETR, or a somewhat different ratio. Instead of only competing on price, they can use a lower ETR to attract customers. Firms can be obliged by law to announce their ETR along with the price (where 1 TCC counts on a par with 1 euro). If firms insist on a high ETR they will lose out to competitors. This will adjust itself. The private sector will probably - on the average - converge to an ETR close to the value declared and practiced by the government, both for sales and wages.

    With TCCs only mediated via mobile phone, the typical payment situation will be bills and coins (euros), and a mobile message sent with TCCs. That means a small, but no big delay at the checkout.

    1. Definitely the ETR is a very promising concept. The TCC proposal should likely incorporate it.

    2. Mr. Trond,
      I appreciate very much your post but many people can argue that you're forgetting the overpower of the financial globalization. You're abstracting your proposal from the World we live in today after the crisis of the 2007.
      If a State print money, and at the same time manage the public expenditure, that means there will be no equilibrium in its balance sheet. States and Governments must follow the same rules people have to follow everyday in real life. Just because they are authorities doesn't mean they're allowed to destroy everything in the name of their sovereignity or whatever.

      So, we don't need another currency. We do need a political union, a banking union, a treasury, common rules for job, industry, market, taxation, and so forth. That's what we need. In others words democracy. We don't want to pay taxes to funding wars between States or currencies. Currencies is not the issue. Lack of democracy is the issue.

      Many regards

  6. To Trond but as well to the blog's authors:

    I don't quite get the following lines in the last Trond's comment: "There is an elegant twist you can make to this system: assume that government declares a general euro: TCC ratio, say 75:25. This ratio (from now on called the "ETR") is fairly fixed but can be changed incrementally just like the Central Bank adjusts the interest rate."

    My objection goes as follows: TCC as defined in the blog is a fiscal rebate on previous tax obligations and is therefore denominated in Euro, although it is given to firms without charge and possibly traded afterwards. I therefore do not get how the government can settle the value of a TCC with respect to the Euro (3:1 or whatever). That could be the case only with issuing a brand new valuta. Please help me to sort this out. Roberto Iacono

    1. The way I see it, the government issue TCC to boost demand, than accept TCC and euro in a preconceived proportion (subject to change each year) for tax payments. Trond, which explored the concept much more than me, will likely further comment on this.

    2. Roberto, a misunderstanding(?):
      for the govt the TCC counts 1:1 with the euro. But the RATIO of euros:TCCs: paid in and out (a ratio between flows) is set by the govt and is for instance 75:25.

    3. Hi Iacono,
      your doubt come out of the fact that you don't pay attention about what the TCC supporters's goal is. Their purpose is to have not only a new currency but also a currency issued by the State. All the ratios and related things are bullshits. Governments can't set any crapping ratios because they can't stop political pressure. Everything in this world gotta have two sides, or more, as majority and opposition, creditors and debtors, issuers and taxers. If not, it doesn't work. Hystory teach us.
      So long pal.

  7. ... note that I mean that both in- and outflows should have the same ratio, for instance 75% euros and 25% TCCs.

    1. Bitcoin is much more better than TCC.
      At least, there is no socialist government behind it.
      No contest.

    2. There is no government behind Bitcoin, that's true.
      There is NOTHING...
      That definitely DOES NOT make it better !

    3. I did mention bitcoin as a paradox. I hope that helps.