By Biagio Bossone and Marco Cattaneo
As time goes by without Greece coming to terms with its creditors, chances are that Athens will soon be bound to issue a parallel domestic currency. This could happen in at least two different forms, each with deeply different implications.
Greece could issue IOUs, that is, promises to pay euros to the bearer in some future date. These IOUs would be nothing else than euro denominated debt obligations, and would be issued and used to replace scarce euro for public payment purposes.
This type of currency would likely resolve in an unstable solution, and the reason is threefold: (i) with IOUs, the Greek government would be issuing additional euro-denominated debt without any hint as to how it will be able to reimburse them, (ii) replacing euro payments for public salaries and pensions with IOU disbursements would be the same as announcing publicly that Greece cannot stay in the Eurozone, and (iii) neither aggregate demand nor GDP expansion would be achieved.
The alternative 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. Liquidation of TCC would take place against purchases of TCC by those who 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 gross labor costs by assigning, say, 200 TCC to each domestic employer who pays a monthly salary (gross of taxes and social costs) of 2.000 euros; and fund humanitarian actions, job guarantee programs, and the like.
The TCC option is based on a very different idea than that underpinning the IOU. Unlike the latter, the TCC option introduces a stimulus that expands demand and triggers economic recovery. As long as the total amount of circulating TCC is not too large as a percentage of GDP and gross government fiscal revenue, TCC will be valuable and well accepted by the general public, and will trade at not too high a discount vis-à-vis the euro.
The TCC option would be a superior solution than the IOU, and would allow Greece to remain in the Eurozone, while increasing citizens’ purchasing power, reducing domestic labor costs, and boosting GDP growth. This would also generate, in due course, higher gross tax receipts (which would offset the shortfall in euro fiscal revenue due to TCC issuance).
If, as it appears to be the case, Greece had problems in repaying short-term debt installments to the ECB, the IMF and Eurozone partners, it should unilaterally and immediately 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 could presumably be limited to spreading the 2015 debt repayments through 2016-2018.
The EU and ECB might not like the TCC option, oppose it, and take such action as suspending the Emergency Liquidity Assistance to the Greek banking sector. But this would precipitate the Grexit, which is precisely what everybody wants to avoid. It would be unwise for this to happen. It appears unlikely, too.