Fiscal Money for Italy

Wolfgang Munchau, in his April 28, 2019 Financial Times article (“The Unbreakable, Unsustainable Eurozone”) has concluded that “More likely, instead, is that parallel currencies, unconventional debt securities, or even cryptocurrencies will offer opportunities for an official grey exit. It will turn out that you can be inside and outside the eurozone at the same time. The unbreakable and unsustainable will find a way to coexist”.

This is consistent with the policy proposal that was long advocated by the Group of Fiscal Money, even if we do not characterize it as a way to be “inside and outside the eurozone at the same time”. Rather, it is the path to make it sustainable by fixing its current dysfunctionalities.

What is Fiscal Money? It is a transferable and negotiable bond issued by government, which bearers may use for obtaining tax rebates two years from issuance. Such bond carries immediate value, since it incorporates a state commitment to accept it in exchange for reductions of future fiscal obligations, and it may be instantaneously exchanged against euros or used as a payment instrument (parallel to the euro) in a dedicated platform.

Fiscal Money would be allocated, free of charge, to supplement employees’ income, to fund public investments and social spending programs, and to reduce enterprises’ tax-wedge on labour. These allocations would increase domestic demand and (by mimicking an exchange rate devaluation) improve enterprise competitiveness. As a result, Italy’s large output gap would close without affecting the country’s external balance.

According to the International Financial Reporting Standards, Fiscal Money bonds would not constitute debt, since the issuer would be under no obligation to reimburse them in cash at any point in time. Also, the European System of Accounts would treat them as “non-payable deferred tax assets;” as such, they would not be recorded in the budget until used for tax rebates (two years after issuance, when output and fiscal revenue will have improved).

Based on conservative assumptions (i.e., fiscal multiplier of 1 and resumption of private investments enough to recover only half of the drop since 2007 in 4 years), a gradual issuance of Fiscal Money bonds that starting in 2019 would peak in 2021 at €100 billion (vis-à-vis the €800+ billion of Italy’s total fiscal revenue) and continue steadily thereafter would raise GDP growth to 3% in 2019-2021 and between 1.5% and 2% thereafter,  thereby generating tax revenues sufficient to offset the tax rebates coming due.

Were the program to under-perform, due to temporary difficulties, safeguard measures would kick in automatically and restore fiscal compliance through: financing select public expenditures with Fiscal Money (instead of euro); raising taxes and simultaneously allocating additional Fiscal Money bonds; incentivizing Fiscal Money bondholders to reschedule their use for tax rebates by enhancing their bond value; and placing Fiscal Money bonds in the market (in exchange for euros). These measures would raise the needed euro cash while avoiding procyclical effects and, importantly, would prevent market uncertainties. The high cover ratio (that is, the ratio between government gross receipts and tax rebates coming due) would make them sustainable.

By activating a Fiscal Money program, Italy would revamp growth without asking anything of anybody: no European treaty revisions; no financial transfers from other countries; and no recourse to the capital market. Public debt would stop growing and start declining relative to GDP, thus attaining the Fiscal Compact goal. And if Italy were ever to lessen fiscal discipline and over-issue Fiscal Money, only its recipients would take the hit since the value of the instrument would fall without hurting the euro or creating default risk (Fiscal Money itself is default-free and the safeguards would protect investors against higher cross-default risk on debt-instruments). In any case, the large cover ratio would make this scenario totally unlikely.

Have we found the “philosopher’s stone”? Certainly not. In an economy with large resource slack, the multiplier and the investment accelerator work their effects largely on output and moderately on prices. And if external leakages are contained (through increased competitiveness), the impact on aggregate demand would be the largest. Finally, revamping demand will benefit productivity and long-term growth, which have both dramatically declined after decades of public and private investment contraction. The so oft-invoked “structural reforms” would do nothing to change expectations and jumpstart growth without a strong and sustained positive demand shock.

Is this a step toward Italexit? Not at all. As Fiscal Money addresses the dire consequences of the Eurosystem’s dysfunctions for Italy, exit is no longer needed. Also, based on our proposal, the total stock of Fiscal Money bonds in circulation would never exceed €200 billion – a very small fraction compared to the stock of bank deposits (€4 trillion) and government debt bonds (€2 trillion) outstanding: Fiscal Money would only integrate existing financial assets, not replace them, while the euro would remain the country’s unit of account.

Fiscal Money is about mobilizing unutilized resources, accelerating investment, and inducing banks to resume lending in a national economy that has lost monetary sovereignty and exhausted the space for conventional active fiscal policy.  

The Group of Fiscal Money, Italy

Biagio Bossone

Marco Cattaneo

Massimo Costa

Stefano Sylos Labini

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