lunedì 9 marzo 2015

Tax National Currencies would save Greece and the Eurozone


No solution is yet in sight for the Greek crisis. Both the EU and most of the Greek people do not want a breakup from the Eurozone. But for the country to achieve a meaningful recovery, austerity must be reversed: a combination of lower taxes and higher social public expenditure is needed to reduce unemployment, mitigate the humanitarian crisis, and improve Greek companies’ competitiveness.

This requires money, which Greece does not have. And European partners are unwilling to subsidize other countries’ deficit spending policies.

A very effective solution would be for Greece to issue a domestic currency, not replacing the euro but circulating in parallel with the euro. Greece could issue two-year, zero coupon Tax Credit Certificates (TCC), which the bearer could use, upon expiration, to pay taxes and whatever financial obligation is due to the Greek public sector at large.

Greece could start issuing € 7 billion (face value) of TCC during the first year of the program. TCC would be given for free (helicopter-money-wise) to individuals and companies (linked to gross labor costs, so to improve competitiveness). TCC would also fund social expenditure, possibly including job-guarantee programs.

TCC would be freely negotiable, so as to allow the initial recipient to convert them in euro, based on a financial market discount. Presumably, use of TCC as a mean of exchange for direct transactions would also quickly develop.

As TCC uses include reducing gross labor costs for domestic enterprises, recovery in Greek internal demand would not create foreign trade imbalances.

TCC issues could increase eg by 7 billion per year up to € 49 billion at year 7 of the program. Assuming a 1.2 fiscal multiplier, at that stage Greece’s GDP would increase – other things being equal - by almost € 60 billion, thus offsetting the fall from the pre-crisis € 240 billion peak to the current € 180 level.

Based on the current (gross) Greek 44% government revenues / GDP ratio, and further assuming nominal GDP to grow (in addition to the TCC impact) by 2.5% per year (due to inflation plus some additional spillover benefit from the much more benign economic environment), the program would be totally self-financing, as Greece’s primary surplus would be higher in each single year. And this would come together with a strong recovery and a massive increase in employment. See below for an estimate of the TCC program benefit, compared with a base case scenario where austerity causes zero growth and zero inflation, while allowing (at the cost of permanent, huge unemployment and social unrest) to achieve a 3% primary surplus / GDP ratio.

 

 






Base year
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9














BASE CASE












GDP
 
 
 
180,0
180,0
180,0
180,0
180,0
180,0
180,0
180,0
180,0
180,0
Public sector revenues
44%
79,2
79,2
79,2
79,2
79,2
79,2
79,2
79,2
79,2
79,2
Public sector expenditure (excluding interest)
73,8
73,8
73,8
73,8
73,8
73,8
73,8
73,8
73,8
73,8
Primary surplus
 
 
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
5,4
Cumulated primary surplus from Year 1
 
5,4
10,8
16,2
21,6
27,0
32,4
37,8
43,2
48,6




























TCC issued
 
 
 
7,0
14,0
21,0
28,0
35,0
42,0
49,0
49,0
49,0
TCC used to pay taxes

 


-7,0
-14,0
-21,0
-28,0
-35,0
-42,0
-49,0
Fiscal multiplier
 
 
1,20
1,20
1,20
1,20
1,20
1,20
1,20
1,20
1,20
1,20
Increase in TCC issued

 
7,0
7,0
7,0
7,0
7,0
7,0
7,0

 
Increase in nominal GDP vs previous year, due to:
 
 
 
 
 
 
 
 
 
 
*TCC (direct effect)

 
8,4
8,4
8,4
8,4
8,4
8,4
8,4

 
*higher inflation + better economic environment
2,5%
4,5
4,8
5,2
5,5
5,8
6,2
6,6
6,9
7,1
Higher real GDP vs base case
 
 
12,9
26,1
39,7
53,6
67,8
82,4
97,4
104,3
111,4




























Gross public sector revenues / GDP assumed to be unchanged at
44%







Higher gross public sector revenues
 
5,7
11,5
17,5
23,6
29,8
36,3
42,8
45,9
49,0
TCC used to pay taxes
 
 
 
 
7,0
14,0
21,0
28,0
35,0
42,0
49,0
Higher primary surplus
 
 
5,7
11,5
10,5
9,6
8,8
8,3
7,8
3,9
0,0




























INCLUDING THE TCC EFFECT










GDP
 
 
 
180,0
192,9
206,1
219,7
233,6
247,8
262,4
277,4
284,3
291,4
Public sector revenues

79,2
84,9
90,7
89,7
88,8
88,0
87,5
87,0
83,1
79,2
Public sector expenditure (excluding interest)
73,8
73,8
73,8
73,8
73,8
73,8
73,8
73,8
73,8
73,8
Primary surplus
 
 
5,4
11,1
16,9
15,9
15,0
14,2
13,7
13,2
9,3
5,4
Cumulated primary surplus from Year 1
 
11,1
28,0
43,8
58,8
73,0
86,7
99,9
109,2
114,6

 

 

The primary surplus would fund interest payments and debt principal amortization. While some rescheduling would still be necessary, a debt write-off could be avoided. And definitely much more interests and debt would be repaid than under the current austerity-extend-pretend framework: based on the assumptions above, cumulated primary surplus in nine years would be more than € 110 billion instead of less than € 50 billion.

In case a minimum, agreed-upon primary surplus (e.g., 3% of GDP, as in the base case above) is not achieved in a specific year, a “safeguard provision” could be contemplated calling for certain government expenses being made in (additional) TCC instead of in euros; or transitory additional taxes being levied while entitling the taxpayer to receive TCC of equivalent value (actually, not a tax but a compulsory euro-for-TCC swap). It is unlikely that those measures would be necessary if the TCC reform is properly designed, but even then, those safeguard provisions would be far less contractionary than procyclical austerity measures requiring outright taxes and / or expenditure cuts to offset a budget shortfall.

Basically, national TCC would allow Greece to end austerity and reflate the economy while neither breaking off the euro nor asking anybody for more money. Greece would instead recover full employment while strongly improving its creditors’ position.

A properly designed TCC system would be a stable one. Not only Greece, but each Eurozone country should introduce it as needed to recover full employment and moderate, positive inflation, while avoiding trade unbalances (as TCC would be partially allocated to reduce corporations’ gross labor costs, thus improving competitiveness).

A group of Italian economists and researchers (Biagio Bossone, Marco Cattaneo, Luciano Gallino, Enrico Grazzini, Stefano Sylos Labini) is currently promoting such a project to thoroughly reform the European Monetary System. See here.

Eurozone peripheral countries should enter in national TCC programs with a view to achieving, each year, a zero euro outflow / inflow balance and to gradually reducing public debt (the “real” one, to be reimbursed in euro) as a percentage of GDP. It should be noticed that the TCC outstanding are not part of the debt stock, since they must not be reimbursed and cannot create a default event.

The EU and the ECB should recognize the viability of the TCC reform to make the EMS sustainable, to end the depression and to remove the euro break-up risk.

9 commenti:

  1. And after that parallel-money, what are you going to print? A parallel of the parallel? Higher public expenditure? Do you wanna establish a Soviet in Greece or what? Please expand.

    RispondiElimina
    Risposte
    1. Establishing soviets not in our purposes. Reducing taxes and re-opening hospitals - yes. Parallel to the parallel not needed. One national currency suffices.

      Elimina
  2. Anonimo, the main problem for countries in crisis is the lack of solvency of both public authorities and the general public. The crisis becomes worse, since less solvency of both state and population reduces even more both state's revenues (less taxes collected) and private economy (less money spent on goods and services = more companies shut down, even more people lose their jobs or face wage reductions.

    Mr. Cattaneo's solution stops the snowball! For a better understanding, let us call TCCs "teuro", from "tax euro". 1 teuro = 1 euro. Anybody could use teuro to pay taxes owed to that authority. How teuros enter the circulation? It's simple. The authorities print (mint) teuros and use them to pay large parts of either wages of their employees or public procurements.

    In public procurement, when buying electricity, gasoline, food, stationery etc, the state will find some sellers who will accept to be paid partially with teuros. So, instead to pay 1 euro for a liter of gasoline, the state will pay 0.85 euro and 0.15 teuro, which can be used to pay taxes on gasoline.

    Of course, after two years, when these teuros will reach their "maturity", they must be written off from the tax collection. Apparently, the state will collect less real money (euros) then, than today. But actually the state have already spent this money, providing now food and heating for children in schools, paying now wages that support the consumption and thus the private economy, keeping now ambulances functional, providing now gasoline for police cars.

    At that moment in the future, after two years, the state will issue other teuros. The state may even sell teuros on a free financial market, which are so avid of any sophisticated financial instruments. Let us consider that the state will organize a public auction for 10 billion teuro. Private investors will buy it with a 10% discount, for 9 billion euro. Thus, the state will make 9 billion euro right now, out of thin air, without borrowing any money! These 9 billion euro could be used to pay the current debt of the state. So the teuro not only helps the state to avoid new debts, but also reduces the existing debt.


    All the government has to do furthermore it to raise a little bit the taxes, to stimulate the need for teuros. As Mr. Cattaneo underlines very well, a 4.5 - 7.1% inflation is necessary to melt away the snowball completely. Sincerely, this is the "price" to be paid for this solution: a 4.5%-7.1% inflation and a limited rise of taxes. Nothing is really for free. After all, this is a very reasonable price and categorically, far more preferable than the alternatives.

    One alternative would be the so called "austerity". It doesn't fix none of the problems: debts, unemployment, negative growth, just because it can't. But don't believe my words, look yourself at all countries committed to austerity and tell me a single one which has managed to reduce significantly the unemployment, or its debts, or to experience now very good growth rates, even after so many years of harsh austerity? The honest answer is none.

    A second alternative would be the Euroexit. If you prefer it….

    A third alternative would be to borrow even more "foreign" money, as the euro is now for Italy, for ATM like interest rates, like there is no tomorrow.

    RispondiElimina
    Risposte
    1. Very well summarized, Laurentiu ! Just one little remark: the 4.5 - 7.1 increase in nominal GDP necessary to avoid ANY shortfall in the 3% target primary surplus in ANY single year is not even an inflation rate. It's an increase in nominal GDP (in addition to the TCC directly induced growth) caused by inflation (or by other benign effects to real growth which might come along the economic more stable environment). In case the effect is entirely due to inflation, a 2.5% rate (ie much lower than 4.5% - 7.1%) would suffice.

      Elimina
    2. to: Laurențiu-Nicolae

      If you say "there are no alternatives", you are not saying the entire true. Yes, lack of solvency is the main issue among others. However, if you want to get it, you got to make it first. You have to build a fiscal authorities in order to spread the solvency capabilities of the entire europe all over others contries. If so, even if a single state can't be solvent, entire europe always will be. On the contrary, another kind of "state money" will not solve the problem because too much "State" is the problem. In Italy we have 68% of taxes because of the State. Not because of the Eurozone. People know very well whose fault is.
      So long.

      Elimina
    3. Not true. In Italy we could immediately reduce taxes by printing money, without any negative effect - neither as concerns inflation, nor interest rates. Eurozone IS the problem.

      Elimina
    4. Anonimo:

      I don't intend to convince you about anything.

      1. I didnt't say "there are no alternatives". On contrary, I described 4 (four) alternatives.

      2. The greatest thing with the TCCs designed by Marco is the fact that, unlike the euro, the TCCs aren't compulsory! If you dislike the TCCs, nobody forces you to use them. Stick with the euro. Or maybe you like the US$, or the GB£. Stick with whatever currency you like.

      Marco says: "If you like the TCCs, use them. If you dislike them, don't use the TCCs". It's that simple.
      The State you dislike so much says: "Eat the euro, whatever you like it or not".

      And by the way: The State you dislike so much dislikes the TTCs too. On your stance against the TCCs you are on the same side with the State.

      3. This is why I am baffled to see people who are against the TCCs, even if nobody tries to impose them the use of theseTCCs.

      And the same people who are against the TCCs express their admiration, almost worship, toward the euro, a compulsory currency.


      4. Don't you contradict yourself, just a little? You said: "You have to build a fiscal authorities in order to ....", then you said also "...because too much "State is the problem".

      TCCs designed by Marco don't need a new State authority as you ask for.

      5. Your demands for less "State" are correct and I subscribe to them. But now you contradict yourself again, when you say: "Not because of the Eurozone", because the Eurozone is the ultimate State thing. They don't match together at all, "less State" and the "Eurozone".

      The so called Eurozone, in fact officially called "the Economic and Monetary Union", needed the creation of a new state entity: ECB, with an unknown number of staff, The European Central Bank, where all EU countries have shares according to their GDP, including the non-Euro countries!

      Thus, the Bank of England has 13.67% of its shares, while Banca d'Italia has 12.31%..

      6. You ask for less State, but you praise the Eurozone, which means a new State institution, the ECB, a useless one in my opinion, because Banca d'Italia was sufficient for Italy. It has one of the biggest gold reserve in the world, nearly 2,800 tons (which is worth roughly 100 billion euro!). This gold saved Italy several times.

      Unlike Banca d'Italia, the ECB hasn't a gold reserve, as I know. Therefore, the euro is among the most empty "State" currencies in the world.

      7. Your blame on the Italian State is somehow exaggerated, in my humble opinion. Before the advent of the euro and of the European Rate Mechanism III, Italy has a bigger GDP per capita than the UK, even during the "reign" of Thatcher (1979-1989) and entered the select club of the 7 most developed countries of the world. Italy is a great country, an innovative country, with so many important companies, technologies and highly qualified staff.

      Elimina
    5. Thanks for reply Laurențiu,

      there are no contraddictions in what we are talking about. you see inconsistency in our position just because you don't know (we think) how things really work in Italy. Our problems come from the past. Eurozone gave us other 15 years of time. We did waste years. It's time to change.

      Yes, during '79-'89 we was in better position, but just because there was Berlin Wall, communism and things related. There was no globalziation at that time. And overall there was some kind of strong military and political forces "behind the wall", hence democracy and market in Western Europe. This is the truth.

      Obviously, the use is not mandatory, but TCCs are able to put Italy in danger. Then the Eurozone as a whole. TCCs are not a joke but a real money instead. Money got power like an atomic bomb, as unregulated shadow banking show us in financial markets recently. We need to place "atomic bombs" in secure hands.

      Less State and Eurozone is not a contradiction. Yes, we got to work to change Eurozone. This way does not work. Anyway, if europeans will destroy Europe for the "third" time, the rest of the World will eat Europe like slices of "pizza".Finally, ECB has gold reserve obviously.

      Altough we do not agree with him, Cattaneo's work is a good work and we like to discuss with him and with other people in this forum as well.
      So long.

      Elimina
    6. Thank you for your appreciation, but a couple of comments are IMHO necessary.
      Italy can, having its your currency, expand demand, reduce taxes, recover all the damages created by the crisis from 2008 onwards, without creating excessive inflation or external umbalances. Globalization, the fall of the Berlin wall, reforms made or not made in the past do not prevent Italy to have this opportunity.
      As concerns TCC having the ability to put the Eurozone in danger: if Italy and other Eurozone countries introduce TCC appropriately, the Eurozone becomes sustainable. If the ECB gets mad at Italy doing this and puts Italy out of the Eurozone (violating treaties and committing suicide in the process) that's ITS choice, not Italy's. And if the ECB and the EU want not just the euro not breaking up, but permanent austerity and depression in the Eurozone - well, this is just crazy, and unacceptable. And won't go ahead for long, anyway.

      Elimina