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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La nostra risposta a CESifo

Come Gruppo della Moneta Fiscale abbiamo pubblicato pochi giorni fa la nostra risposta alle obiezioni formulate dal think tank tedesco CESifo in merito al progetto Moneta Fiscale / Certificati di Credito Fiscale.

Qui l'articolo, che riprende con varie estensioni i contenuti già pubblicati in italiano qui.

CESifo e i CCF

In un suo recente rapporto sull’economia europea, CESifo, uno dei più noti istituti di ricerca tedeschi, dedica una certa quantità di spazio (pagine da 68 a 70) ai nostri CCF, in inglese denominati Tax-Credit Certificates (TCC).

Personalmente apprezzo l’interesse dimostrato, ma ritengo necessario far notare che il rapporto contiene parecchie imprecisioni.

Prima di entrare nel merito della nostra proposta, a pagina 66 il report esamina alcuni precedenti storici, commentando che “they have a mixed track record”. L’analisi però commette un errore di omissione molto grave, perché cita parecchi esempi ma si scorda totalmente del caso di maggior successo, i MEFO bills di Hjalmar Schacht (anche se quantomeno evita lo sfondone clamoroso di qualcuno che, a dispetto di ogni evidenza storica, addirittura affermava - vedi l'ultimo punto di questo post - che si era trattato di un fallimento…).

Entrando nello specifico, vale anche la pena di notare che a detta degli autori del report l’esame della proposta CCF (come anche dei MiniBOT di Claudio Borghi) is “largely based” su un articolo di tale Papadia del Bruegel Institute (un altro istituto di ricerca, fortemente europeista). Il che è probabilmente all’origine di molti fraintendimenti e imprecisioni. Ma perché analizzare una proposta sulla base di un fonte di seconda mano, quando da anni io e miei colleghi del Gruppo Moneta Fiscale scriviamo diffusamente in merito (abbiamo pubblicato due libri e solo questo blog comprende circa 800 articoli, in grande maggioranza dedicati al progetto Moneta Fiscale / CCF ?).

Ad ogni modo:

CESifo scrive, in merito ai TCC, che “the program would stop after four years”. Non è così: l’emissione di CCF cresce gradualmente e si prevede che raggiunga il suo livello massimo al terzo (non al quarto) anno, ma poi prosegue nella misura necessaria a raggiungere gli obiettivi di massima occupazione compatibili con la stabilità monetaria. I CCF sono uno strumento flessibile e sono modulabili in funzione delle circostanze: non è da escludere che un futuro divengano meno necessari e che quindi le quantità emesse possano anche scendere, o addirittura azzerarsi in condizioni di crescita economica particolarmente sostenuta. Ma il programma proseguirà per tutto il tempo necessario, e resterà quindi uno strumento a piena disposizione dei decisori politici.

Troviamo poi detto che “The author of the proposal argue that even although there will be no legal obligation for private parties to accept payments in TCCs in exchange for goods and services, this may happen if payment infrastructure allows for their circulation as electronic securities. The motivation behind the idea of using electronic form for TCCs is not explained. One possibility is that in this way they would be less likely to be treated as a parallel currency by the ECB then if they were in paper form (the MiniBOT). However, they would also be more readily used for criminal activities (see the next subsection)".

L’idea di emettere CCF in forma elettronica è esclusivamente dettata da considerazioni di efficienza e praticità, e non ha nulla a che vedere con quanto possa o non possa affermare la BCE (i CCF non violano in alcun modo il suo monopolio in merito all’emissione di moneta ad accettazione obbligatoria). Quanto all’”utilizzo per attività criminali” gli autori dello studio fanno confusione: il rischio (a loro dire) si applica alle criptovalute, ma noi non stiamo proponendo l’emissione dei CCF in modalità “cripto”.

Più avanti, si afferma che “while the issuer is committed to redeem these securities, the redemption is not against the money (euro) and is, therefore, of lower value than standard BOTs”. Ma gli autori non tengono conto di un punto molto chiaro della nostra proposta:  è vero che i CCF non danno diritto a ricevere euro ma riduzioni di tasse; finché, tuttavia, i CCF che giungono a maturazione anno dopo anno sono di dimensione molto inferiore al gettito fiscale lordo del settore pubblico italiano (ed è così, con uno scarto enorme) in pratica la differenza di valore tra un BOT a due anni e un CCF a due anni sarà minima.

Ancora: “[the CCF] holders would… be forced to trade them prior to maturity in case of financial needs… [which] would shift wealth from budget-constrained tax-payers towards agents able to speculate on the value of these securities”. Questa affermazione ignora completamente quanto citato al punto precedente (alti sconti sono da escludere perché i CCF che arrivano a maturazione sono solo una piccola parte del gettito lordo) e sembra anche supporre che chi riceve i CCF li debba pagare (altrimenti da dove nasce il “wealth shift” ?) mentre, al contrario, li ottiene gratuitamente. Anche nell’inverosimile caso in cui CCF per un valore nominale di 100 fossero trattati sul mercato per esempio a 80, quell’80 sarebbe comunque reddito addizionale per il ricevente. "Wealth increase", non "wealth shift".

Si afferma poi che “there would be no competitiveness gain as the wage level would remain unchanged”, ignorando un punto chiave della proposta – l’allocazione di una parte dei CCF alle aziende, a riduzione del costo effettivo del lavoro.

Una delle affermazioni più curiose, poco più avanti, è che “these proposals would not provide anything – from the purely technical point of view – that euro-cash and standard government bonds cannot already provide”. Grazie tante: è proprio perché l’attuale struttura dell’eurosistema impedisce agli stati azioni espansive della domanda (sia mediante “euro-cash” che per il tramite di “standard government bonds”), anche quando l’economia è in depressione da più di dieci anni (come ahinoi l’Italia), che abbiamo elaborato la nostra proposta !

Gli autori dimostrano poi di non conoscere trattati e regolamenti Eurostat, affermando che “TCC are tools for increasing the government deficit… from an accounting point of view, this is obvious since these IOUs would be distributed without any counter-payment from their receiver”. Tre sfondoni in poche righe: primo, i CCF non sono IOUs; secondo, sono non-payable tax credits che Eurostat identifica incontrovertibilmente come NON debito; e terzo, en passant che c’entra l’assenza di un “counter payment” ? BOT e BTP, che sono debito, vengono collocati sul mercato proprio a fronte di un pagamento…

Insomma: apprezzo l’impegno degli economisti di CESifo. Ma se fossi il loro professore universitario non potrei che congederli con un “approfondisca e ci vediamo al prossimo appello…”.

A parallel currency for Italy is possible

Articolo pubblicato su Politico Europe - risolvere le disfunzioni dell'Eurozona è possibile, anche mantenendosi nel solco degli attuali trattati e regolamenti.

Progetto CCF / Moneta Fiscale: presentazione in inglese

Qui il link (e come di consueto, ringraziamenti a Francesco Chini).

Eurozone needs a flexible euro – not “some” flexibility

By Biagio Bossone and Marco Cattaneo

Talks of “flexibility” are currently much in fashion in the Eurozone. The EU Commission accepted many of the Italian proposals to exclude certain extraordinary items – including costs to manage the immigration crisis – from the budget deficit limits. Italy will then not be forced to implement contractionary budget actions in 2016.

Meanwhile, Spain missed her own budget targets. A 5.2% deficit was recorded in 2015, exceeding the 4.5% commitment (in itself already a concession, since the Stability and Growth Pact (SGP) and the Fiscal Compact (FC) call for much stricter limits). The Commission could sanction and fine Spain, but everybody expects a waiver to be granted.

Clearly, enforcing fiscal rules is a problem in Europe. It’s easy to see why. Fiscal consolidation was imposed starting from 2011, much before the Eurozone had fully recovered from the 2008 financial crisis. Many countries experienced a heavy double-dip recession. Demand is still depressed and unemployment is far too high.

Many Eurozone countries require demand expansion, which implies a temporary increase in deficits and debt (as a percentage of GDP) to achieve much stronger growth and lift the economies from current depressed conditions. But the political consensus to thoroughly revise the SGP and the FC is just not there.

As a result, the “flexibility” granted by the EU Commission is just a “kick-the-can-down-the-road” exercise. Fiscal rules are neither enforced nor revised. The Eurozone as a whole keeps stagnating. Disaster may well be avoided as the ECB’s “whatever-it-takes” commitment and its Quantitative Easing program prevent a run on sovereign debts, but lack of growth and employment opportunities feeds Euroscepticism and strengthens anti-establishment parties.

In a few months (October 2016), next year budget programs will start being proposed by country governments, discussed by national parliaments and submitted in draft to the Commission. Under the current set of rules, a further round of postponement exercises is all too easy to predict.

How can this be avoided? Can the Eurozone be fixed in a satisfactory and permanent fashion?

Yes, it can, provided the Eurosystem is reformed to make itself flexible. An effective way to do it is to have selected countries issuing national Tax Credit Certificates (TCC).

TCC are securities that entitle their holders to reduce tax payments some time after (say, two years) their issuance. They will be assigned, free of charge, to employees (to supplement their income) and to enterprises (to reduce total labor costs). A portion of the TCC issued could help fund social programs and public investment, as appropriate.

TCC would be marketable securities. Holders could convert them into cash, at a discount (presumably small, as the market would be wide and liquid) on their face value. TCC recipients’ disposable income and net worth would immediately increase, supporting demand, consumption and corporate investments. Per capita income and employment would be permanently higher, lifting the Eurozone as a whole out of the depression.

On the budget side, higher GDP – led by higher demand and the income multiplier effect – would increase tax revenues during the two years prior to TCC redemptions. Even under conservative estimates, the larger gross tax revenues following GDP growth would exceed the fiscal revenue shortfalls due to the tax discounts from TCC redemptions.  

Importantly, TCC are not debt: issuing countries have no obligation to reimburse them, and issuing governments may not be forced to default on TCC-related obligations. TCC, therefore, imply no risk to financial stability.

As a result of the nominal GDP growth induced by the TCC, each TCC-issuing country would fulfill its commitments under the SGP and the FC, reducing on a timely and consistent fashion its public debt / GDP ratio. Level and allocation of future TCC issuances would be managed to stabilize each country economy, to achieve satisfactory employment, and to improve enterprise competitiveness (as labor costs would be reduced by TCC allocations). This would also allow each country to avoid external trade imbalances following from higher domestic demand.

A wide range of additional tools would be available for each country to manage negative, temporary deviations from fiscal consolidation targets. Holders of TCC could be induced to postpone TCC redemptions for tax discounts by offering them an increase in the face value of their TCC holdings in exchange for their decision to postpone redemption. In addition, long-term TCC could be issued to refinance euro-denominated debt, thus speeding up the consolidation of the total stock of public debt outstanding.

In the unlikely event that all of this were insufficient, countries could implement “safeguard clauses” by raising taxes (to be paid in euro) or cutting expenses, while at the same time increasing TCC issuances. All the above measures would be “non-procyclical safeguard clauses” and would not imply the recessionary impact created by “debt brakes” as currently envisaged by the Eurozone rules (which is the reason why they are, in practice, difficult or even impossible to enforce).

An efficient, sustainable “flexible Eurosystem” can be created. The TCC would be deeply instrumental to that purpose. The time to act, and to end the Eurozone depression, is long overdue.

Helicopter Money (or something similar to it) for the Eurozone

By Biagio Bossone, Marco Cattaneo, Enrico Grazzini, Stefano Sylos Labini

What can Italy and the Eurozone crisis-countries do to fight persistent deflationary tendencies, in the face of the ECB failing to reach its 2% inflation target through QE? ECB president Mario Draghi has announced that the institution is willing to extend and expand its QE program. But is this the most effective solution?

Bernanke, Friedman, Keynes and helicopter money

In 2002, in a now famous speech before the National Economists Club in Washington, former US Fed chairman Ben Bernanke, speaking about stagnation in Japan, recommended that “A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. ... A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money”.

Milton Friedman, in fact, was not the only economist who thought about pouring money from helicopters out to people in the streets as the most effective stimulant to a depressed economy. Keynes himself had written as much provocatively on the subject, suggesting that in the absence of other measures it would be socially useful for the public authority to bury bottles filled with banknotes and let individuals unearth them, thus increasing incomes and jobs via the multiplier effect. Similar forms of monetary cum fiscal stimulus – which HM is all about – were thereafter recommended by as diverse and well-known economists like Henry Simon, Irving Fisher and Abba Lerner.

Eventually, the best that Bernanke (and his colleagues from the major central banks) was able to come up with was QE. Yet QE is not HM. Unlike HM, the money coming from QE may be issued only in exchange for other assets: it works indirectly through price effects, and does not add new spending power to the economy. Also, the money from QE gets into the economy through banks and financial intermediaries, which can only on-lend it to those few firms and households that during a depression are willing to borrow and are creditworthy enough. Finally, unlike HM, the money from QE goes to well-off individuals who are typically less inclined to spend than those relatively less well off.

In the Eurozone, the ECB has so far pumped billions of QE money into the banking systems, but little of it has gone into new lending at more favorable terms to borrowers.

The inadequacy of QE has eventually gained new adepts to HM as a more effective tool. In the UK, the idea has gained traction on the political left with the proposal for a QE for the people, or QEP, by Jeremy Corbyn, the new leader of the British Labour Party, according to which the central bank would print money and purchase bonds issued by a to-be-established National Investment Bank, which in turn would use the money to fund public infrastructure projects. Under Corbyn’s proposal the state would direct most of the new monetary stimulus.

Fiscal money

In Italy and the Eurozone countries, where monetary and fiscal rules would prohibit the use of HM, we think it is possible to conceive of a policy instrument that is similar in spirit to HM while being compliant with existing rules.  We call it Tax Credit Certificates (TCC). TCC are issued by the government and entitle their holders to tax rebates equivalent to TCC face value; holders may exercise their right after two years from TCC issuance. TCC do not involve a government commitment to repay some future debt; they commit the government to accept redeemable TCC in exchange for tax reductions.

The government assigns TCC (free of charge) to households and enterprises, and uses them also for certain payments to the public administration. Like government bonds, TCC trade in the financial market. Their discount is close to that on a two-year zero-coupon government bond. TCC sellers are households and enterprises that need immediate liquidity; buyers are households, enterprises and any other subjects who want to use them to save on taxes.

TCC are allocated to households in inverse proportion to their income, both for social equity purposes and to incentivize consumption decisions. To maximize their impact on demand, TCC could be provided to households through a special fiscal card under a ‘spend it, or lose it’ constraint, forcing cardholders to spend their allocations within, say, a year, or face their cancellation. TCC allocations to enterprises are proportional to their labor costs, and act as labor-cost cutting devices, immediately improving their competitiveness. Greater export and import substitution following cost and price reductions not only create more output and employment, but also offset the impact of increased demand on the external trade balance. A portion of TCC issuances can be used to support public utility infrastructure initiatives as well as social welfare programs.

TCC issuances are calibrated to close the ‘output gap’ caused by the crisis. In the case of Italy, they could start from a level of 5% of annual GDP, increase gradually up to 10%, and then be modulated so as to ensure high levels of employment consistently with domestic (inflation) and external (trade) balance.

Thanks to the income multiplier, which is particularly high in the case of large resource underemployment, the expansion of GDP over the two years before TCC redemptions generates new fiscal revenues sufficient to cover the budgetary impact of redemptions. Our estimates [http://temi.repubblica.it/micromega-online/“per-una-moneta-fiscale-gratuita-come-uscire-dallausterita-senza-spaccare-leuro”-online-il-nuovo-ebook-gratuito-di-micromega/] suggest that a multiplier of 0.8 would suffice to ensure fiscal sustainability of the TCC maneuver, meaning that it would not impact the deficit/GDP ratio.

TCC issuances can be decided autonomously and democratically by national parliaments and governments, without requiring prior consent from European institutions. In fact, since TCC do not create debt and are denominated in euro, they fully comply with European rules.

Conclusion

The TCC program stands as a Keynesian type of intervention, centered on the preference for fiscal policy as a cure to ‘liquidity trap’ diseases, while it draws from HM the principle of ​injecting new purchasing into the economy.

Italy and the Eurozone crisis countries can and must recover using their own strength, without demanding that most competitive countries, like Germany, come in their help.

The TCC program can help governments revamp their economies, while not endangering financial stability and external balance.

A New Mechanism for the Eurosystem

By Biagio Bossone and Marco Cattaneo

Lost hopes and new realism

Today’s Eurosystem is certainly not the system that many European citizens had in mind when they first thought about the single currency. Indeed, they expected a system built on strong rules and discipline. Yet they expected above all a system whose new currency - the euro - would be a symbol of and a vehicle to further European integration, cooperation and economic prosperity. To that vision the euro has become the biggest obstacle, proving to be an instrument of division, a source of conflicts, and a generator of arrogance and subjugation.

For those who cultivated the dream of a unifying currency, thinking today of reforming the EU institutions with a view to bringing them back into that dream is pure illusion. We start from this premise. Yet, being aware of the deep uncertainty surrounding a traumatic breakup of the system, we propose a set of measures that would make possible within the system’s  current structure to:

·         Engineer economic recovery by those member states that are most affected by the crisis

·         Minimize the risk of default from member states that are most exposed to debt, and

·         Allow a soft exit for those member states that choose to leave the euro.

A fiscal plan

In an economy where the public sector may not increase spending, we propose that the government issues special non-debt instruments, the Tax Credit Certificate (TCCs). These certificates entitle their holders to a reduction of taxes, fees and all other financial obligations to the public sector, two years from their issue-date and for amounts equivalent to their face value. We will discuss the two-year deferral period shortly. The TCCs are transferable securities that can be traded for euros, thus making immediate spending possible. Likely, these securities will trade at a discount of a similar size to that on a two-year zero-coupon bond. Those who sell TCCs want to be able to spend their value. Those who buy them acquire the right to future tax cuts (and therefore to future savings). Financial intermediaries can buy TCCs at a discount from those who want to sell them, and will either use them for future tax cuts or sell them at a lower discount and make a profit in return.

TCC assignments

Individual member states of the Eurozone issue TCCs and assign them (free of charge) to a number of social categories and for a number of purposes, including:

·         Employees and self-employed workers, both in the private and public sector: this adds to their actual net income

·         Companies, based on their labor costs: this reduces the tax wedge (and hence their gross staff costs) and improves their competitiveness

·         Measures to support social spending, such as unemployment benefits, integration of income and minimum pensions, benefits for disadvantaged social groups

·         Financing and co-financing of public investment and public works (public procurement with payments partially or totally paid out in TCCs instead of euros).

As the state assigns TCCs to households and companies, many households will want to convert them into euros for spending purposes. Companies, on their side, will likely do the same or will take advantage of the lower tax burden to lower their prices and restore competitiveness. In a depressed economy, spending stimulated by TCC issuances will have a multiplier effect on income and employment. Prospects of credit risk will improve and strengthen the incentive for banks to resume lending to production and investment. During the two-year deferral on the TCCs, new output will follow from new spending and will generate new tax revenue that will finance the tax reduction. This will prevent the deficit-to-GDP ratio from going up.

TCC volumes and allocations

Eurozone member states shall establish a program for the issue of TCCs, aiming to achieve the following results:

·         Stimulating domestic demand and consequently increase GDP and employment

·         Improving external competitiveness of domestic production (via TCC assignments to companies): this prevents the increase in domestic demand from resulting in foreign trade imbalances, by supporting exports and encouraging import substitution

·         Fighting deflation or chronically below ECB-target inflation.

The TCCs are hybrid securities...

The TCCs are not debt instruments: the issuing state makes no commitment to repaying them in euros, it only promises to reduce taxpayer obligations by an equivalent amount. There is no possibility, either theoretical or practical, that the issuing state might be forced to default on the TCCs.

The TCCs are not legal tender. The only legal tender of the Eurozone member states remains the euro. No private or public entity is obliged to accept payments in TCCs. Bank deposits continue to be denominated in euros, and public and private budgets and balance sheets continue to be drawn up in euros.

...yet they are a store of value and potential means of payment

While they are not legal tender, the TCCs bear two characteristics that are typically associated with money. They are a store of value, since the right to future tax reliefs attached to them is a source of value. And they are a potential means of payment since, apart from legal obligations, it is likely that the TCCs will circulate and be accepted for payment in exchange of goods and services, provided that the payment infrastructure allows for circulation of electronic (dematerialized) securities.

Fiscal stability

Public budget targets

The treaties that govern the operation of the Eurosystem bind member states to attain certain fiscal targets. When general economic conditions are bad, the attempt to achieve a reduction of the public deficit through restrictive fiscal policies produces pro-cyclical effects. Under such effects, either the governments fail to achieve the given targets, or they have to impose additional costs on the society if they want to secure their achievement. The introduction of the TCCs addresses this internal inconsistency of the Eurosystem. Each member state can commit, for example, to maintaining a zero balance between euro receipts and payments, as it can rely on TCC assignments to engineer the necessary stimulus.

Sustainability of the program CCF

For all countries of the Eurosystem that need to stimulate demand and recover external competitiveness – most notably Italy, Spain and France – a TCC program would in all likelihood be sustainable. With a fiscal multiplier (ratio of GDP growth and TCCs issued) slightly less than one, these countries would achieve the policy objectives described above (raise output and employment, balance foreign trade, price stability) without worsening the deficit-to-GDP ratio. Moreover, if the fiscal multiplier exceeds 1 (as econometric evidence generally shows to be the case in all highly depressed economies), the program non only fully funds itself but also generates additional fiscal resources. When two years after issuance the TCCs start being used to reduce tax payments, the higher tax revenues resulting from the higher level of GDP offset the decline in revenue due to the use of the TCCs.

Safeguard clauses

However, if a government that is implementing a TCC program has difficulty reaching its fiscal targets, due to, say, less than favorable economic conditions, it can take a number of actions to ensure a balanced euro budget and public debt consolidation. Specifically, it may introduce a number of safeguard clauses into the program, which would be triggered in the event that output growth were to generate less tax revenues than expected. The government may:

·         Announce its commitment to finance a (presumably small) share of its expenses in TCCs

·         Compensate taxpayers for tax raises by assigning them with new TCCs (this would be equivalent to replacing tax increases with compulsory TCC-for-euro swaps)

·         Incentivize TCC holders to delay the use of their maturing TCCs for tax rebate by increasing the value of their TCC holdings (this would be equivalent to paying an interest in the form of new TCCs)

·         Raise euro funds from the capital market by placing TCCs with longer maturities instead of issuing debt.

The effect of these clauses would be way far less pro-cyclical than cutting public expenditure and/or raising taxes since, as under EU rules, they would not drain purchasing power from the economy and would only replace one type of assets (euros) with another (TCCs) in the portfolio of TCC holders.

Financial stability

Breaking the spiral between sovereign debt crisis and banking crisis

The introduction of the TCCs also creates conditions for reducing and gradually eliminating another serious problem inherent in the Eurosystem. Financial institutions, in particular the national banking systems, hold large amounts of government bonds issued by their government. As a result, state insolvency causes severe disruptions to them.

As TCCs starts being issued, banks can partially replace traditional government bonds with TCCs on the asset side of their balance sheet. This progressively lowers the risk that state default hits the local banking system.

Eurosystem monetary stability and “soft” exit option

Underperformance of fiscal targets, due to, say, less favorable than expected revenues, may lead certain countries to increase excessively the issuance of new TCCs (for example as they need to resort to safeguard clauses too often). In this case, the TCCs would lose value in terms of domestic prices but that would not affect the value of the euro, avoiding any negative impact on the countries that do not issue (or do not over-issue) TCCs.

A country that would over-issue TCCs eventually might find itself in a situation where the domestic circulation of TCCs would be predominant with respect to that of euros. At that point, there will be the possibility (which might in fact be regulated a priori) to transform the TCCs into a national currency, thus de facto enacting a soft exit from the Eurosystem.

What would our partners think?

German leading opinion – currently personified by Germany’s Minister of Finance Wolfgang Schaeuble – has got the point that the Eurosystem, as it is, doesn’t work, unless Keynesian policies and fiscal transfers are adopted. But this is taboo for Germany and the other North-European countries. In this light one should read the wisemen report and the plan written by Schaeuble himself, both just released.[1] In practice, both documents delineate proposals to strengthen the ordoliberal rules governing the system and to provide for the exit of those members that are not able to live with the rules. In this regard, Germany was (and still is) ready to let Greece go.

Against this background, it would be reasonable to assume that the TCC program might not be rejected by Germany and its satellite states, since it would eventually allow for the exit of Italy, Spain, and probably even France. While Germany would further on its integration with countries that can follow its rules (the Netherlands, Austria and some others), other countries would de facto part with the system. Yet the TCC program would ensure their debt repayment capacity, since their public debt would rapidly decline in proportion to their GDP thanks to the balanced euro budget rule and the safeguard clauses discussed above.

For a new mechanism of the Eurosystem: Conclusion

A sweeping reform of the Eurosystem would require an overhaul of its architectural design, its central institutions, and even the principles underpinning its policies. We do not nurture such an ambition, as we see neither the premises of it nor the countries and the leaders who can inspire it. On the other hand, we are aware that breaking up the system might have destabilizing and potentially dangerous and costly consequences.

We therefore propose a revision of the system, which, on the one hand, would allow crisis countries that want to remain in it to achieve rapid economic recovery, as well as fiscal and financial sustainability, while on the other it would prepare for a soft exit those countries that do not want to stay in the system or cannot live by its rules.

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[1] Ses on Reuters, “German "wisemen" say euro zone states should be able to go bankrupt”, 28 July, 2015 (http://mobile.reuters.com/article/idUSB4N0ZN01L20150728) e on the Financial Times, “Schäuble outlines plan to limit European Commission powers”, 30 July 2015 (http://www.ft.com/intl/cms/s/0/88352cf2-3697-11e5-bdbb-35e55cbae175.html#axzz3hYe9OAHs).