sabato 25 aprile 2015

Greek parallel currency: how to do it - and how not

By Marco Cattaneo and Biagio Bossone
According to several recent media reports, both the Greek government and the ECB are taking into consideration the possibility (for Greece) to issue a parallel domestic currency (PDC) to pay for government expenditures, including civil servants salaries, pensions etc. This could happen in the coming weeks as Greece faces a severe shortage of euros.
It is important to stress that the introduction of a Greek PDC could take place in at least two ways, with deeply different implications.
The first avenue would be for Greece to issue IOUs, ie promises to pay to the bearer euros upon a future time expiration. Basically, these IOUs would be euro denominated debt obligations, issued and used to replace euro to pay salaries, pensions etc.
The second avenue would be to issue Tax Credit Certificates (TCC) and assign them to workers and enterprises at no charge. TCC would entitle the bearer to a tax reduction of an equivalent amount maturing in, say, two years after issuance. Such entitlements could be liquidated in exchange for euros and used for spending purposes. On the other hand, TCC purchasers would provide euros in exchange for the right to the future tax cuts.
TCC assignments would supplement disposable incomes and thus stimulate demand. As an example, by issuing TCC the Greek government could:
increase net monthly salaries by paying, say, 1.000 euros plus 100 TCC instead of just 1.000 euros;
reduce actual gross labor costs by assigning, say, 200 TCC to each domestic employer which pays a salary (gross of taxes and social costs) of 2.000 euros; and
fund humanitarian actions, job guarantee programs, and the like.
The first avenue is likely to trigger the effect envisaged by Costas Lapavitsas, Jacques Sapir, Frances Coppola and many others. In Lapavitsas words: “This is not a sustainable arrangement. It’s only a stopgap measure. And, at the end of the line, it’s a stopgap towards the exit, basically. It needs to be understood as such. So yes, I’m in favor of it… But be under no illusion that this could be a permanent, stable solution”.
The reason why the IOU avenue is not a permanent solution is twofold: (i) the Greek government would be issuing additional euro-denominated debt obligations without any hint as to how it will be able to reimburse them, and (ii) replacing euro payments for salaries and pensions with IOU disbursements would clearly indicate to the general public that Greece cannot stay in the Eurozone.
The second avenue, the TCC one, is based on a very different idea: Greece aims at attaining a proper balance between euro government payments and euro governmental receipts. In addition, to expand demand and trigger a strong economic recovery, it introduces a supporting tool. As long as the total amount of circulating TCC is not too large as a percentage of GDP and of gross government fiscal revenue, TCC will be valuable, will be accepted by the general public and will trade at not too high a discount vis-à-vis the euro.
The TCC avenue would clearly be a superior solution, and would allow Greece to stay in the Eurozone, while stimulating demand by increasing citizens’ purchasing power, reducing domestic labor costs, and strongly increasing GDP. This would also generate, in due course, higher gross tax receipts (which will offset the shortfall in euro fiscal revenue due to TCC being used to settle future taxes).
If, as it appears to be the case, Greece has problems in repaying short-term debt installments to the ECB, the IMF and Eurozone partners, it should unilaterally announce (i) the implementation of the TCC program (ii) a commitment to generate a euro primary surplus (euro receipts less euro payments, TCC disbursements not included) of, say, 1% of GDP in 2015 and 3% of GDP from 2016 onward, and (iii) a proposal for a new repayment schedule, which would presumably include spreading the 2015 debt repayments through 2016-2018.
The ECB and the EU could react negatively to such an announcement, taking actions such as the suspension of the Emergency Liquidity Assistance to the Greek banking sector, which would precipitate the Grexit. On the other hand, this would precisely cause the outcome that everybody wants to avoid. It would be unwise and, arguably, unlikely to happen.

22 commenti:

  1. Both solutions are basically the same thing, that is a total default for Greece. As a consequence of that, you will also undermine the Eurozone as a whole. The natural and subsequent devalution of the new greek money will destroy southern italian economy. Agricolture, tourism trade, shipping and so on. Also a lot of italian industries will find out Greece as a convenient place to delocalize their productions. Finally, just because a contry can leave the Eurozone, it doesn't mean that contry won't need the same reforms it needs today.

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    Risposte
    1. No reason for what you are saying, the TCC path is sustainable as they supplement, do not replace the euro. As concerns the reform mantra, closing a 20-30% unit labor cost gap between Northern and Southern Europe can be achieved immediately via TCC (as well as via a currency realignment). Via "structural reforms" aka internal devaluation just destroys the Southern economies.

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    2. With or without TCC, you got to spend what you gain. Hence, no reason to leave the Eurozone. Is it a mantra? Try mother nature. So long.

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    3. Mother nature told me Italy has a 10% output gap. A monetary system different than today eurozone allows me to fill this.

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    4. If you wanna print money you got to buy printing machine first. Unfortunately, you sold your personal printer for 200 billion of euros in exchange during 2002-2008. Two hundred billion of euros. Real money. Gone with the wind as thin air. Whose fault is it?

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    5. Printing machine for Tax Credit Certificates not sold. Each country which raises its own taxes can issue them, whenever it likes.

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    6. Italian State print 800 billion of euros for public expenditure and it has 2.200 billion of debts. That means it doesn't lack of money. It has a big managing money problem instead. Yes, you're right, also Europe has a big problem but they are eventually going to the right direction.

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    7. Italy was forced (in 2011-2013) to introduce big contractionary fiscal actions, demand depression (induced by the 2008 financial countries) notwithstanding. The other eurozone countries (other than Greece) much less. This is the ONLY reason why Italy and Greece are lagging behind the rest of the eurozone. Which is performing poorly overall, anyway.

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    8. Big contraction in domestic demand, set off by strong fiscal actions, is a side effect and not a cause. The cause of the problem is lack of unification in Europe and debt-to-gdp ratio out of wack in many contries where economic reforms was postponed for too many years.

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    9. Debt to gdp ratios do not prevent you from introducing expansionary measures to cope with a demand depression if you borrow in your own currency (more precisely, if you can print your own currency). Actually, austerity in a depression raises, not lowers, debt to gdp. And reforms do not pull you out of a liquidity trap / depressionary economic environment.

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    10. Euro is already your own currency.

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    11. It's the currency we USE. It's not the currency we ISSUE.

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    12. The capital stock of the ECB is owned by the central banks of all 28 european member states. Italian central bank got two state-controlled agency like inps and inail as shareholders among many other private banks indirectly owned by political parties which are used to indicate their board of directors. Moreover, Italian Government "print" 800 billion of euros every year. And recently, the prime minister issued 80 euro in addition.

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    13. 80 euros which were more than entirely offset by higher taxes on gasoline, real estate etc. As concerns the 800 bln, Italy's public deficit was forced not to exceed 3% and then to be reduced even below, while USA and UK went above 10% to trigger the recovery.

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    14. That's because USA and UK was in a better position about debt-to-gdp ratio. Morevoer, they have flexile economy. USA was at 64% and UK at 45%. Italy was at 110%. If it weren't for that, they would do the same strong reforms Italy is facing now. Hope that helps.

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    15. No, it doesn't. If the public debt is denominated in your own currency, ratio to GDP tells nothing about your ability to finance more deficit spending. Look at Japan. Your central bank just fully guarantees it. Public debt denominated in your own currency is just sovereign money. It's a term deposit with your own Treasury. This doesn't mean you can grow it at libitum - you have to stop when inflation increase too much. But this is not a problem in today demand-depressed environment.

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    16. We're afraid to say you're forgetting that Japan debt is owned by the contry itself. By contrast, Italians don't like to buy their national bonds. Because they don't trust their national State, even if they like it so much. So you can't print anything. That's why you'd like to give money for free (TCC) because you know this is the only way to impose a money. Unfortunately, a free money won't last long.

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    17. Definitely you don't know the attitude of the Italian population. Italians are BIG savers, and even today they like to put their money in government bonds (in addition to buy their own house). 70% of the Italian public debt is owned domestically. An opportunity to expand the holding of government securities, provided they yield something more than the current - very meager - returns on existing treasury bills and bonds, would be more than welcome.

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    18. Domestically is not an answer. Italian banks are owned by France and Germany. The most important italian lenders. You borrowed money and sold banks too. No wonder you have an internal depressed demand.

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    19. Italian banks' shareholders are still largely Italians. Plus, most of government debt belong to individuals, either directly or via mutual funds, insurance policies and the like.

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    20. Do you think so? Goog going. But you are supporting a parallel currency project, aren't you? That means what you wrote in the last post is not what you really think.

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    21. I'm supporting a parallel currency project because I believe it's much more efficient and much less controversial than breaking the euro up.
      What I was telling you previously is that Italians are more than willing to hold state-guaranteed securities with a decent yield. As they always did.

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