As no solution is yet in sight for the Greek crisis, the possibility of introducing a parallel currency is receiving increasing attention from economists and the financial press. Together with a group of Italian economists, we have devoted considerable attention to developing a viable scheme.
We deem it important to point out that parallel currency schemes fall into two broad categories, with deeply different implications. The first would call for Athens to introduce IOUs (promissory notes), which would be used by the government to pay public salaries and pensions, thus freeing up euros for external debt service. European institutions and leaders have not denied this possibility.
In fact, IOUs would not prevent Greece from defaulting chaotically. If Greece started using IOUs as substitute for euros, this would signal its inability to stay within the Eurosystem. Bank deposit runs would accelerate, and Grexit would follow. In any case, the commitment to reimburse the IOUs in euro would have no credibility, since Greece is de facto insolvent.
The Greek government could instead introduce an instrument that would mobilize euros for domestic private-sector spending, thus supplementing the purchasing power of households and enterprises. The difference is subtle and often escapes even expert attention.
Greece today runs a balanced primary public-sector position. This means that it receives as many euros as it spends, net of interest payments. If payments to creditors were to stop, Greece would have enough euros to support its public expenditures: it would not need to introduce a monetary instrument to replace short euros.
What Greece is missing, instead, is the resources to re-launch its economy. To this end, it should issue what we call Tax Credit Certificates (TCCs). These certificates entitle bearers to equivalent tax discounts that would mature in, say, two years after issuance. Such entitlement could be liquidated in exchange for euros and used for immediate spending. Liquidation of TCCs would take place against purchases by those who want to acquire them for future tax discounts. For investors, TCCs would be a very safe instrument with a yield comparable to a two-year zero-coupon bond: by not being debt, it would be impossible for the government to default on them.
Through liquidation, TCCs allow future tax discounts to be transformed into current spending. Even under most conservative estimates (i.e., fiscal multiplier below one), the output recovery triggered by the TCC stimulus and taking place before TCC redemption would generate enough fiscal revenues to compensate for the euro shortfalls caused by redemption.
It is worth noting that while they incorporate some currency features, TCCs would not be legal tender and would not affect the ECB’s monopoly status as issuer of the euro.
The Greek government could issue, say, 7 billion euros of TCCs (about 4% of GDP), to be assigned to a variety of uses: allocations to enterprises in relation to their labor cost (so as to immediately improve their competitiveness), workers’ salary support, and social transfers to needing households. Receivers of TCCs could exchange them for euros in the financial market at discount on their nominal value. The discount would be small, since total TCC issuances would not be large relative to total fiscal revenues (7 billions would only represent about 10% of total gross revenues). TCC assignments would supplement disposable incomes and make Greek exports competitive.
There would not be “Gresham’s law” effect, whereby a bad currency drives the good one out of circulation: TCCs would supplement, not replace, the euro and their overall stock outstanding would not be large enough to displace the euro.
Greece should propose to creditors a new financial plan whereby it would commit, say, 2% of GDP to external debt payments (in euro) starting in 2016. The commitment would be credible once taken in the context of a pro-growth economic program driven by the TCC stimulus. In addition, safeguard clauses could be introduced and activated in the event of underperformance vis-à-vis the 2% reimbursement commitment. For instance, the government could entitle taxpayers to receive additional TCCs bearing longer maturities as compensation for additional euro tax payments, or TCC holders could be incentivized to postpone the use of TCCs for tax discounts by receiving an increase in their face value. Such safeguards would be hugely less pro-cyclical than those typically imposed by the EU to secure budget targets in the event of fiscal underperformance.
A “euro+TCC” system would be stable and sustainable. Greece’s unit of account and legal tender would remain the euro. Yet the country would gain the means to jump-start the economy, and the prospects for its creditors would improve enormously.
Political reactions are obviously a different matter. The EU and ECB might oppose the idea and even take punitive action against Greece, such as cutting it off the Emergency Liquidity Facility. This would precipitate Grexit. But this is what Europe doesn’t want: such reaction would betray ideological furor, and risk triggering the crumbling of the Eurosystem. We think this is a very unlikely scenario.