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.