An agreement was reached last Monday in Bruxelles to try and solve the Greek crisis. But nobody believes that the outcome will be sustainable. Alexis Tsipras was not brave enough to go for Grexit, and accepted instead austerity measures even harsher than the earlier ones. Combined with the negative impact of the negotiation stalemate of the last few months, and the bank holiday that started two weeks ago (and is not over yet), this will cause a further steep decline in Greece’s GDP, in 2015 and 2016 at least.
The largest share of the new loans will go to refinance the old ones, under an “extend-and-pretend” framework, and to recapitalize the banks. No adequate financing will be made available to support domestic demand and invert the debt deflationary spiral. The IMF predicts that the public debt / GDP ratio will exceed 200% and has issued a strongly negative judgment on the program. This makes it very unlikely for the Fund to adhere to the new program, and raises doubts on Euromembers’ willingness to go ahead with it.
Greece may be too small to destabilize the world economy, but much larger countries such as Italy and Spain, and possibly France, face similar (albeit less extreme) problems: low growth, high unemployment, spiraling debt ratios, lack of fiscal space and higher financial fragility. In the worst of circumstances – say, a major euro crisis confidence – these countries might become the epicenter of a world financial tsunami. In the best of circumstances, their citizens will be bound to relentless economic decline.
We believe that a thorough Eurosystem reform is not only long overdue but, regrettably, also impossible to undertake under the current European leadership. At the same time, a system breakup, unless well planned and orderly executed, would bring us all into unchartered waters.
Our proposed approach to exit this nightmare can be independently implemented by each country, while it would avoid disrupting the system. A national government, say Italy, could issue rights to tax cuts two years after issuance. Call these rights tax credit certificates (TCCs). These are non-debt bonds that only commit the government to reducing the tax burden of their bearers by an amount equivalent to the nominal value of the bonds two years after they have been issued. We’ll discuss the two-year deferral in a moment.
The TCCs are transferable, can be sold in exchange for euros, and may be thus used to finance immediate spending. Those who sell TCCs want to get euros to buy stuff. Those who buy TCCs want to acquire rights to future tax cuts (which means more future savings). Financial intermediaries can buy TCCs from sellers at a discount and either use them for future tax cuts or resell them at a lower discount and earn a profit.
The government allocates newly issued TCCs to households and enterprises. Many households will want to convert them to finance consumption. Enterprises can use tax reductions to cut prices and gain competitiveness. In a depressed economy, the new spending stimulated by TCC issuances will have multiplier effects on output and employment. Credit prospects will improve and banks will have an incentive to start lending again to finance production and investment. The new output will raise fiscal revenues. As projections show, a small multiplier (0,8) and the two-year deferral on the TCC would be enough to avoid that the fiscal deficit in two years time would increase as a result of the TCC-induced fiscal cuts.
The TCCs could act as a quasi-money instrument and might even be used by the public as a currency parallel to the euro. This has raised a lot of misunderstandings, in particular by implication that their issuance would break euro rules. This is non-sense: the TCCs would not be issued by the government as a currency to replace the euro. The public and the market, however, might use them any way they wish, even as money, as for any financial instrument). The only thing that matters is that the TCCs would make possible for the government to engineer a huge tax cut / demand support action in a situation where no other policy lever is available. The TCCs would enable the private sector to monetize and spend today the tax cuts maturing in two years and allow enough time for demand-driven output to increase and generate the fiscal revenues needed to finance the tax cuts.
Are there risks that this program might not work?
No, there are not, if basic Keynesian macroeconomics is right, as it has proven to be since 2008, and if expansionary austerity proves to be a deep failure, as it has plenty shown.
Besides, TCC issuances can be supported by "safeguard clauses" to be triggered if output growth were to generate less fiscal revenues than anticipated:
First, the government could announce a commitment to pay a fraction (presumably, just a small one) of its public expenditures with TCCs.
Second, taxpayers could be entitled to receive TCCs as compensation for additional euro tax payments: this would be equivalent to replacing tax raises with compulsory TCC-for-euro swaps.
Third, TCC holders could be incentivized to postpone the use of TCCs for tax reductions by receiving an increase in their face value (equivalent to interest income being paid in the form of TCCs).
Fourth, the government could raise euros in the market by placing TCCs with longer maturities instead of debt bonds.
These safeguards would be much less pro-cyclical than those imposed by the EU to secure budget targets. In fact, they would easily accommodate for even significant shortfalls in primary budget surplus targets.
A “euro + TCC” system would be technically stable. Yet, it would be possible for the TCCs to evolve into new legal tender, and ultimately replace the euro, if need be. This would be a political decision. Should we get there, our alternative approach would allow for a “velvet”, efficient, and non-disruptive winding up of the euro.
we are already through uncharted watersRispondiElimina
Hi Mr Cattaneo,RispondiElimina
Thank you for adding a bit of further details to the idea of Tax Credit Certificates (TCC).
I first saw the idea on on Vox EU. And I am trying to get my head around various parallel currency ideas.
Here is one which I thought up, together with other ideas on how to help Greece from my blog:
But I have a few questions on your proposal, if I may?
I am not sure how these credit certificates are going to be issued, in detail, and to whom.
Previously (in Vox EU) you said that they would only be issued to "Workers and enterprises free of charge" here you seem to be suggesting that these TCC could also be available to pay government expenditure.
In Vox EU you said that 8, 16, 24 should be made available in the first four years, so that a total of 48 bn are outstanding after year 3. But despite pumping 48bn into the economy (about 27% of Greek GDP), the benefit in GDP growth are relatively modest:
Against a baseline of 1.5% nominal growth (real 1%) per year (no TCC), you expect nominal 6.3% growth (real 4.3%) per year if multiplier is 1.5, and nominal growth of 4.3% (real 2.4%) if multiplier is 0.8. That is after year 3.
I am not certain how many certificates you expect to be changed into Euro, and at what price (discount rate)? Again, who would benefit? As the person/enterprise being issued with TCC will have a benefit over other members of society who were not issued with these certificates. The TCC represent real spending power now (if discounted) and members of society who have not got them will lose out.
Further, you said that details of the simulations could be made available on demand.
Could you please forward them, so that I could have a look at them?
Perhaps after I have seen the simulations, it will make more sense to me.
Thank you very much for your help.
"I am not sure how these credit certificates are going to be issued, in detail, and to whom.Elimina
Previously (in Vox EU) you said that they would only be issued to "Workers and enterprises free of charge" here you seem to be suggesting that these TCC could also be available to pay government expenditure."
===> That's right: workers and enterprises will account for most of the issuances, but we believe a portion might be allocated to fund / co-fund welfare expenditure, public investments etc.
"In Vox EU you said that 8, 16, 24 should be made available in the first four years, so that a total of 48 bn are outstanding after year 3. But despite pumping 48bn into the economy (about 27% of Greek GDP), the benefit in GDP growth are relatively modest:
Against a baseline of 1.5% nominal growth (real 1%) per year (no TCC), you expect nominal 6.3% growth (real 4.3%) per year if multiplier is 1.5, and nominal growth of 4.3% (real 2.4%) if multiplier is 0.8. That is after year 3."
===> TCC impact on each year growth depends on the increase of TCC issuances vs previous year, not on the absolute amount in a specific year. As requested, I'm sending you by email a few details which should help to clarify the matter.
"I am not certain how many certificates you expect to be changed into Euro, and at what price (discount rate)? Again, who would benefit? As the person/enterprise being issued with TCC will have a benefit over other members of society who were not issued with these certificates. The TCC represent real spending power now (if discounted) and members of society who have not got them will lose out."
===> We expect a marginal propensity to consume of around 90% initially, declining to 80% in a couple of years as the economy improves, and a discount rate of 10% (on a yearly basis), gradually declining to 5%. This for Greece: the discount rate would be definitely lower for Italy.
As concerns allocation, this is of course a political decision, as is always the case for fiscal policy. We deem it important to have a sizable proportion allocated to enterprises (30-40%) to improve competitivity and to avoid external trade umbalances. Our base case is predicated on incentives to private expenditure being higher than allocations to welfare expenditure and public investments, but a different breakdown is indeed possible and not necessarily less beneficial to GDP recovery.
the goal of tcc project is not about economic growth. on the contrary, their aim is to monopolize the issuing of money back in the hands of the state like statocratic contries do. fortunately, people are not against eurozone but against austerity instead. yes a kind of schmuck austerity based on a closed economy. we lack economic freedom in europe; we have a lot of taxes; no firm competition; huge red tape costs; in a nut we don't have freedom to build our future. those the problems are. not money. austerity is just only a stupid attempt to freeze the problems and not to solve them.RispondiElimina
Without controlling the money you cannot put an end to austerity...Elimina
you can control money, public expenditure, taxes, with no need to print money.Elimina
Money I cannot control, if I don't print it.Elimina
you print money everyday, too much money, with no reforms. that's your problem. money won't work this way.Elimina
"You" ??? Not me. And not the Italian state.Elimina
you had better not looking for a scapegoat, buddies.Elimina
No scapegoat. Putting to work idle resources. That's the key to recovery.Elimina