How Italy Could Save the Euro

Yves here. A wee problem is that Eurocrats overwhelmingly are of the view that there’s nothing wrong with austerity; the problem is that countries don’t practice it diligently enough. It’s striking to see how long Germany (and its northern allies like the Netherlands) have been able to run what amounts to a test to destruction for the Euro and Eurozone. Germany insists on running large trade surpluses within the EU, yet is unwilling to lend to its trade counterparts, and is also opposed to more federal level spending to buffer the performance of weaker economies.

As Lars Syll pointed out on the question of Italy’s mini-bot plan (hat tip UserFriendly):

To me, the idea of introducing a ‘parallel currency’ more than anything else shows that the euro crisis is far from over.

The tough austerity measures imposed in the eurozone has made economy after economy contract. And it has not only made things worse in the periphery countries, but also in countries like France and Germany. Alarming facts that should be taken seriously.

Europe may face a future with growing economic disparities where we will have​ to confront increasing hostility between nations and peoples. What we’ve seen lately — especially in France — shows that the protests against technocratic attempts to undermine democracy may go extremely violent.

The problems — created to a large extent by the euro — may not only endanger our economies, but also democracy itself. How much whipping can democracy take? How many more are going to get seriously hurt and ruined before we end this madness and scrap the euro?

The problem is, as we described long form during the 2015 Greek bailout negotiations, is it would take a bare minimum of three years to do all the coding and coordination needed to introduce a new currency, which given how large IT projects go, means 5 to 6 years at best. It would require coordinated action of the many players in the international payments system. And don’t try strategies like “just do it”. Even introducing a physical currency takes a year, and not being able to move money electronically is tantamount to cutting a country off from trade and tourism.

By Marshall Auerback a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute

Italy is now experiencing its third recession in a decade, its economy’s downward trajectory increasingly resembling Dante’s descent into his Inferno’s nine circles of hell (minus the prospects of ultimate redemption). Following the EU rule book to which it promised compliance has “asphyxiated Italy’s domestic demand and exports—and resulted not just in economic stagnation and a generalized productivity slowdown, but in relative and absolute decline in many major dimensions of economic activity,” writeseconomist Servaas Storm.

The sovereign bond buying program initiated by the European Central Bank (ECB) president, Mario Draghi, likely prevented the destruction of Europe’s capital and credit markets and therefore saved the monetary union. As the monopoly issuer, the ECB was the only institution that could credibly make the pledge to do “whatever it takes to preserve the euro.” But Draghi’s monetary gymnastics have been singularly ineffective in restoring his native country’s economic growth, because the ECB’s “aid” is tied to the continued embrace of fiscal austerity by the recipient national governments. This condition was introduced to allay Berlin’s concerns that “profligates” such as Italy would otherwise get a free ride on prevailing low German interest rates, which (in theory) would enable their governments to spend away without consequence, thereby creating a potential Weimar 2.0 within the Eurozone as a whole. Far from creating hyperinflation, however, the arbitrary fiscal rules governing the European Monetary Union (EMU) are actually exacerbating existing disparities by locking countries like Italy into further deflationary impoverishment.

The obvious solution would be to model the EU on a true federal fiscal union such as the United States, Canada, or Australia and therefore better align the political institutional arrangements with economic needs. That was a step too far when the Treaty on European Union (aka the Maastricht Treaty) was ratified to further European integration in 1992. Given intensifying strains between the EU’s historically closest allies today, the political conditions to create a viable supranational fiscal union are even more problematic. There are, however, other ways to resolve Italy’s economic stagnation that rationally get us beyond this mindless adherence to the EMU rulebook.

In a recent interview in the Italian publication Libero Quotidiano, former Prime Minister Silvio Berlusconi mooted the introduction of a parallel domestic currency, the so-called mini-bills of Treasury (“mini-BOTs” for short), which would in theory allow Italy to exit austerity without exiting the eurozone. Italy’s Five Star/Lega coalition government has also embraced the idea. The ECB and the European Commission, predictably, oppose the mini-BOT’s introduction, seeing it as an existential threat to the single currency and a means of avoiding the fiscal rules established at its creation.

Are these fears justified, or can it work? What are the potential consequences—and what forces stand in its way?

The ongoing obduracy of Brussels to any unconventional proposal that goes beyond its tired Stability and Growth Pact (the SGP—the fiscal rulebook governing membership in the single currency union) potentially represents an even greater existential threat to the euro than Italy’s proposed new fiscal experiment. Much like Captain Bligh’s promise that, “the beatings will continue until morale improves,” the European Commission’s overreaction ignores the fact that the economics behind the mini-BOT are sound. They are grounded in a theory known as “chartalism.” Chartalists argue that currencies become money because of the active involvement of the state. Predicating his “functional finance” approach on neo-chartalist insights, the American economist Abba Lerner made the following argument in his essay on money and taxation in the 1947 edition of the American Economic Review:

The modern state can make anything it chooses generally acceptable as money… It is true that a simple declaration that such and such is money will not do, even if backed by the most convincing constitutional evidence of the state’s absolute sovereignty. But if the state is willing to accept the proposed money in payment of taxes and other obligations to itself the trick is done. (Emphasis mine)

Lerner’s key insight is that in a post-gold standard world, fiat currency has no intrinsic value per se. Money is “tax-driven,” and its “value” comes from the state’s imposition and enforcement of a tax liability on its citizens, which in turn creates the demand for people to hold it and use it as the principal economic means of exchange. The key proviso is that the state alone has the capacity to determine what is necessary to pay taxes, and likewise it alone has a monopoly on enforcing that tax liability. Two private parties can agree to use any form of payment that they like (e.g., a cryptocurrency), but they cannot mandate using this unit of account to pay taxes. Only the state can do that.

Determining what constitutes legal tender for the settlement of tax liabilities opens up considerably more fiscal policy space for a national government. Hence the appeal to Rome, as their proposed mini-BOT would give Italy’s government more policy options to generate an economic expansion commensurate with higher incomes and more job growth.

There are past instances of parallel currencies, operating alongside and in support of the national currencies. These have been particularly effective during periods of acute economic distress. For example, in Argentina as the financial crisis deepened after 2000, local governments began to issue “patacones” (bonds with interest) as local currencies to pay workers and suppliers. As Rob Parenteau and I noted,

Utility companies began to accept them—knowing they could pay part of their taxes with them—and acceptance spread even to international corporations such as McDonald’s.” (Emphasis mine)

In the same paper, we also highlighted multiple examples of parallel scrip operating at the same time in the United States during the 1920s:

These were used interchangeably and included:

1. Gold Certificates (redeemable in gold coin until FDR’s prohibition on private citizens holding gold)
2. Silver Certificates (redeemable for coin or bullion)
3. National Bank Notes (issued by US government chartered banks with equivalent face value of bonds deposited by bank at Treasury)
4. United States Notes (issued directly by Treasury and also called Legal Tender Notes, but with no ‘backing’)
5.Federal Reserve Notes (redeemable in gold on demand at Treasury or in gold or ‘lawful money’ at any Federal Reserve Bank, until FDR’s prohibition, when it was just declared legal tender redeemable in lawful money at the Fed or Treasury)

In none of these cases did the countries concerned experience hyperinflation; nor did these quasi-currencies actually undermine the existence of the prevailing national currency.

So on the face of it, there is nothing in the mini-BOT proposal per se which would suggest that it constituted an existential threat to the euro or, indeed, to Italy’s monetary system. In fact, quite the opposite if it is a success, as it could establish a workable template for other distressed member states, assuming the tacit support of Brussels (which could otherwise undermine it, in conjunction with the ECB, as any Greek could attest).

The latter qualifier is key, as the mini-BOT remains highly controversial, both politically and legally. In terms of the latter, many, such as Lorenzo Codogno, a former chief economist at the Italian Treasury, claim that the introduction of a parallel domestic currency would contravene the terms of the European Monetary Union treaty. The Maastricht Treaty itself was not explicit on this point (see here for the alternative view from one of the co-designers of the euro, Bernard Lietaer, who advocated for parallel currencies). The real concern is political, a view typified by Riccardo Puglisi, an economist at the University of Pavia. Puglisi sees the mini-BOT not as a complement to the euro, but rather as “a way to facilitate the exit of Italy from the eurozone.”

Those who share Puglisi’s suspicions are not without cause, given the number of members in the Italian Cabinet who are explicitly anti-euro, notably the minister of the interior, Matteo Salvini (also the leader of the Lega Party in the governing coalition). Concerns remain that Salvini regards the mini-BOT as a means of engineering a full exit from the euro in furtherance of his party’s broader nationalist/populist agenda. So we have the makings of a battle between the custodians of the currency, notably the European Central Bank, versus Italian populists, and other anti-euro supporters of the nation-state, many of whom are calculating that Brussels will ultimately yield on austerity on the grounds that the alternative—an “Italexit”—would represent a greater threat to the single currency and, indeed, a catastrophic step back from “an ever closer union.”

Salvini’s view is by no means the definitive one in the Italian coalition. Neither its technocrat prime minister, Giuseppe Conte, nor the Italian president, Sergio Mattarella, supports full-on exit from the EMU. To avoid a split or constitutional crisis on the issue (which could force new elections), Rome is therefore currently trying to have it both ways, arguing that since there has been no legislation to turn the mini-BOT into authentic “legal tender,” it therefore does not represent a violation of eurozone membership. The vote taken on the mini-BOT was classified as “non-binding.” But ultimately, if the mini-BOT is tacitly sanctioned for use in tax payments by the coalition government, it does constitute legal tender in practice. This is the very essence of what turns the instrument from a being a simple IOU between two private transacting parties to something with much broader national fiscal implications.

Therefore, the coalition is walking a fine line between, on the one hand, proposing a policy designed both to secure a broader national consensus and to mobilize credit badly needed to generate economic recovery and, on the other hand, risking widespread bank runs, if the Italian public begins to fear that the mini-BOT does in fact represent the first step toward exit from the single currency.

There are no signs of bank runs yet, and “lo spread” (the gap between Italian and German bond yields) has not significantly widened to dangerous levels, even though it has recently expanded. So far, it doesn’t appear as if the markets are yet taking the Italian government’s proposal too seriously (and based on the coalition’s own past fiscal timidity, perhaps this is rational). The problem is that absent support from the ECB and the European Commission, former Greek Finance Minister Yanis Varoufakis (who tried to introduce something similar in Greece) gives a taste of the likely outcome, based on his own country’s tussle with Brussels and the ECB:

“Once these short-term notes trade on the open market they would become a de facto currency, a new lira in waiting. Italy would have a split monetary system. The euro would unravel from within. My guess is that the ECB would first ration and then cut off Target2 support for the Bank of Italy.”

If the Italian government still didn’t fall into line, capital controls would be the inevitable result as well as outright expulsion from the single currency, argues Varoufakis.

The question is: who gets hurt more in these circumstances, the Italian government (which would now have full fiscal freedom to counteract the impact from expulsion), or the creditor nations of the euro? Consider that French banks hold “around €385 billion of Italian debt, derivatives, credit commitments and guarantees on their balance sheets, while German banks are holding €126 billion of Italian debt,” as of Q3 2018, according to a Bank for International Settlements (BIS) report, cited by Servaas Storm in his appropriately titled article “How to Ruin a Country in Three Decades.” An “Italexit” could therefore generate a European-wide banking crisis.

In the past, whenever a country has breached the rules of the SGP, a kabuki-like ritual has been played out. Much like the old Soviet Union joke—“They pretend to pay us, and we pretend to work”—the Brussels-based European Commission issues a rebuke to the offending country, which, after token resistance for home political consumption, eventually responds and promises to adopt spending cuts to bring them back into compliance. These cuts (if they are in fact implemented) become self-defeating in practice because they can deflate economic growth. Absent an improvement in exports, or an expansion of private debt (which is difficult to do when both borrowers and lenders are already stressed), the problem becomes worse as stagnation is perpetuated and public debt levels continue to rise (via rising unemployment—less taxpayer revenue—and correspondingly increased social welfare payments).

Italy is a perfect illustration of this conundrum. As Storm argues, the country did more than make token efforts to comply: “After 1992, Italy did more than most other Eurozone members to satisfy EMU conditions in terms of self-imposed fiscal consolidation, structural reform and real wage restraint.”

The reward? Perpetual economic stagnation, including the onset of yet another recession today. Storm quantifies the overall damage:

Until the early 1990s, Italy enjoyed decades of relatively robust economic growth, during which it managed to catch up with other Eurozone nations in income (per person)… In 1960, Italy’s per capita GDP (at constant 2010 prices) was 85% of French per capita GDP and 74% of (weighted average) per capita GDP in Belgium, France, Germany and the Netherlands (the Euro-4 economies). By the mid-1990s, Italy had almost caught up with France (Italian GDP per person equaled 97% of French per capita income) and also with the Euro-4 (Italian GDP per capita was 94% of per capita GDP in the Euro-4.

This growth, however, was reversed in the 1990s, as Italy increasingly embraced the “reforms” demanded for membership in the single currency union. The result of such policies, as Storm highlights, is that the income gap between Italy and France is now (as of 2018) 18 percentage points, which is more than what it was in 1960; Italian GDP per capita is 76% of per capita GDP in the Euro-4 economies.”

Hence, the rise of the current populist government. What is harder to understand is why this populist backlash paradoxically coexists uneasily with ongoing support among Italians to remain in the EMU. The answer appears to be because many Italians associate the old national currency, the lira, with Italy’s sordid history: a country long synonymous with political corruption, the widespread infiltration of organized crime—in short, a “Bizarro world” that often appears to be the antithesis of a national development state.

To provide one illustration: Italy has the highest proportion of small businesses in Europe. The employment laws discourage the formation of medium to large businesses, which facilitates infiltration by organized crime syndicates, because small shops and businesses are easy prey for them. Large companies such as Eni or Telecom Italia do not pay a “Mafia tax,” but virtually every family-owned business does. This is not the EU’s doing, but a homegrown problem that many fear would become even worse if Italy was left to its own devices again. All of which largely explains why so many Italians still tolerate the country’s economic serfdom under Brussels.

However, this may be a classic instance of the population confusing correlation with causality. As dysfunctional as Italy was in the bad old days, its economy still grew, and living standards improved in both absolute and relative terms, in spite of the Mafia, domestic terrorism, or widespread political corruption.

What changed post the Maastricht Treaty and the corresponding introduction of the euro was the reversal of Italy’s rising living standards. The country’s older political and social pathologies still remain unresolved; membership in the single currency union didn’t help there. The only thing that changed was that the replacement of the lira with the euro turned a once sovereign nation into a quasi-colony forced into a seemingly perpetual fiscal straitjacket. Consequently, Italy now has the worst of both worlds.

Rome still has a few months before it has to respond to the Brussels report (which could ultimately lead to the coalition government facing significant financial penalties, if it fails to implement the requisite budget cuts to comply with the eurozone’s fiscal rules). The government has already rejected the threat, but that’s also nothing new as the two sides went through this same dance with Brussels just last autumn.

There is, however, a new complicating variable today. The current ECB president, an Italian, Mario Draghi, is stepping down in October. So we’ll be in a situation in which a new ECB president (possibly a German, Jens Weidmann) will have his/her credibility immediately tested, at a time when an increasingly powerful populist government’s own mandate to deliver growth could well be at stake. Perhaps, much as it was the lifelong anti-communist president, Richard Nixon, who initiated America’s opening to the People’s Republic of China, we need an anti-inflation ordo-liberal German as head of the ECB to facilitate real change in the Eurozone. That would certainly make the political calculus less predictable, the outcomes more binary: a “disaster” or a “blessing,” argues Martin Wolf of the Financial Times.

The “phony war” will end soon. The parallel currency at least offers a fresh approach to reverse Italy’s relative economic decline. However, the European Commission’s reluctance to tolerate any degree of experimentation, its politically tone-deaf browbeating of the Italian government to fall into line with prevailing economic orthodoxy actually feeds the anti-establishment and anti-euro forces now politically ascendant in Italy.

The ingredients are therefore in place for a conflict as serious as any that has taken place in Europe during the past half-century, lest more creative economic statesmanship is demonstrated in the months ahead.

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36 comments

  1. The Rev Kev

    ‘…many Italians associate the old national currency, the lira, with Italy’s sordid history: a country long synonymous with political corruption, the widespread infiltration of organized crime’

    There may be a basis of fact in this perception-

    https://www.bloomberg.com/news/articles/2019-06-15/italy-s-mafia-uses-the-old-lira-as-its-own-parallel-currency

    You begin to wonder if the EU continues to shove Italy into this financial fire sac, whether there may be an outbreak of Wörgl Experiments throughout Italy which the Italians would say that they no longer have the resources to crack down on them due to EU austerity policies-

    http://www.lietaer.com/2010/03/the-worgl-experiment/

    Reply
  2. Anonymous2

    Just a few thoughts.

    A lot of Italians like the euro and do not want to go back to the lira because the former is a much better store of value than the lira was. Quite a few Italians seem to be moving elsewhere in the EU, taking advantage of freedom of movement.

    People need to find an explanation why the Italian economy has fared so much worse than the German or French economies in the last twenty years. I am no fan of current eurozone monetary arrangements but suspect the most important factor lies elsewhere. Italy traditionally was a producer of clothing and footwear, where it has been challenged by China. The economies of Germany and France specialise in other goods and have not yet been challenged by the Chinese to the same degree.

    Some economists argue that the Italians created their own problem by allowing wage costs to rise regardless. And of course they no longer have the devaluation tool available to them.

    I am leery of attributing excessive significance to monetary and fiscal policy when analysing economic performance. Of course they have their importance but a lot of other factors are important as well. What I consider ‘real world’ factors like skill sets and foreign competition have a crucial bearing. Even the most inspired fiscal and monetary policies will not turn the Sahara into the centre of world economic activity. I have visited Sicily and Southern Italy on a number of occasions and cannot see them becoming major hubs of economic activity. Geographical distance from the centre of European activity further North militates against it.

    As for the mini-bots, it will be an interesting game to watch. I doubt Italian politicians will want their banking system to crash so I expect a game of chicken to play out in front of us in which they ultimately fold. I could be wrong, though. It would not be the first time.

    Reply
    1. Ignacio

      I think your commentary is well pointed. We can’t blame it all to monetary policy, although german inflexibility doesn’t help. Regarding the comentary of some economists, that is common to spanish economist commentaries, I think that it can be safely trashed. Those always blame it to wages. In my opinion the biggest problem that Italia faces is lack of leadership, or at least a leadership that focuses on the well being of italians rather that their own personal goals. Governments are corrupt to the core at local and state level. Then, italians have suffered Berlusconi for too long, and example on how a government is focused on the interests of a single person instead of the general populace. That is the most corrupt government you can imagine. Then you have the stupid nationalists of lega nord and the like that focus on… resent, racism and stupidity, very much like their stupid catalonian counterparts.

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    2. PlutoniumKun

      Those are very good points. Having a highly overvalued currency never seemed to have harmed Swiss manufacturing. I do think that Italy has suffered particularly from the decline in textiles manufacturing, and I think that for whatever reason it doesn’t seem to have been able to develop a more modern economic sector to match France. Its traditional industries also seem to have suffered a little even within the Eurozone. And countries like Portugal seem to be doing quite well despite sharing many of those characteristics. Relatively speaking, Spain seems to have also fared better.

      It may well be I think that its poor internal political structures have just caught up with the country – it seems perpetually in administrative chaos and in some respects seems simply unlucky – it has had the wrong mix of industries at the wrong time.

      This isn’t to absolve the Eurozone design for blame, I just think that what most Italians will say is correct – the blame for most problems in Italy are buried deep within Italy’s history and its pretty horrible political elite.

      Reply
  3. Eustache de Saint Pierre

    I do not expect that the Brussels ideologues & Germans will change tack, but rather keep digging until eventually it has to be decided what should be engraved on the tombstone.

    Reply
    1. PlutoniumKun

      I don’t believe the northern Europeans will ever give up on their ordoliberalism in time to reform (its not just the Germans, in some respects the Dutch and Finns are even more hardline). The only way around I think is stealth policy changes, often so technical that they aren’t noticed by politicians. I don’t know anything about Wiedmann, the new ECB President, but I can only hope he understands the issues and has the political touch to make the changes needed.

      Reply
      1. Matthew G. Saroff

        The problem is not German Ordoliberalism, but German sado-monetarism.

        The policy is unchanged from what made the Great Depression so brutal in Germany, which in turn led to that guy with the bad mustache taking power.

        It is now leading to mini-me versions of that guy in Poland, Hungary, Austria, France, Germany, Italy, etc., some of whom are in government.

        The problem is that there is no mechanism to deal with Germany’s role as a predatory exporter (China writ small).

        Germany is the cuckoo in the nest that is the EU.

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        1. marku52

          Yes, Predatory trade flows are quite the major problem in the US as well.

          Contributing as well to the election of the fellow with the strange hair…

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  4. Kurt Sperry

    I’ve been in Italy this month and the gnashing of teeth and rending of garments in the mainstream press over the issuance of minibots has been over the top. The framing is always that the issuance of minibots is a direct path to the anticamera (antechamber) of a Euroexit, while the Euro remains overwhelmingly popular here.

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    1. DJG

      Kurt Sperry: I’d argue that the euro is genuinely popular in Italy.

      The dilemma for the EU is that the Italians, supposedly so irrational and prone to corruption, like those darn Greeks, have diagnosed the problem: The introduction of the euro and all of the measures taken by the Italian government to meet financial targets have produced economic stagnation. This is causing the economic collapse of much of the Mezzogiorno and a brain drain.

      This article points out that the proposal for mini-bot has come up before, from Bertinotti, of all people:
      https://www.ilfattoquotidiano.it/2019/06/09/minibot-tria-chiude-non-e-questione-che-tratteremo-a-livello-di-governo/5242522/

      And I’d note that Roberto Fico, who is an adult compared to Salvini and DiMaio, as well as the leader of the left-five-stars, demurs.

      A couple of nitpicks: Whenever I see a writer use the sloppy term “kabuki,” in this case, I guess, referring to those famous kabuki plays about fiscal policy, I look for other cultural slips and misinterpretations. There is an odd sentence about the “Mafia tax,” which the writer seems to think is all over Italy, paid by all small and medium-sized businesses. The fact is that forced bribery tends to be regional. In Sicily, for instance, it is a serious problem around Palermo but much less common in eastern Sicily. It is not much of an issue in the Veneto or Piedmont.

      And Italians consider the family-owned small / medium business to be the basis of what Italians consider a decent life. Just read “Storia della Mia Gente,” by Edoardo Nesi, which is an elegy for the small woolen and fabric mills in Tuscany that were destroyed by globalization. It is one of the reasons I find Luigi Zingales and his prescriptions laughable: He was once all worried that the taxis in Italian cities aren’t “competitive” enough.

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      1. Kurt Sperry

        There’s an old lanificio in Stia near the source of the Arno, today a museum, where you can still see the incredible iron weaving machines — many from Britian or even the US — that once wove cloth. The whole works was powered by the Arno. There were larger mills wiped out too. The bathroom is amazing too :D

        Yes, the “Mafia Tax” is extremely regional, in large swaths of Italy there is no such thing. You might have some issues with ‘ndrangheta in Genova in Piedmont.

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      2. Oregoncharles

        There are parallels with Japan, which seems to have thrived despite an apparently “stagnant” economy – mostly because their idea of a good life is a bit different. (sorry I’m vague; it’s actually a vague impression. I don’t claim to be an expert on Japanese life.)

        However, a difference like that makes membership in the Euro straitjacket even more crippling. It’s interesting to see yet another example of a whole industry destroyed by globalization – one that is probably a real loss, and not just for Italians.

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        1. Plenue

          The Japanese have an often screwed up definition of what a good life is. From everything I’ve seen and read, the existence of the average salaryman is an exercise in pure hell.

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  5. Marshall Auerback

    The introduction of a new physical currency may take time, but you could always “solve” the problem in te first instance via, say, an electronic tax credit.

    I readily admit the politics from Berlin and Brussels is now overwhelmingly hostile, but the prospect of an “Italexit” might well change the dynamics. The new ECB president is going to have a very “interesting” introduction to his new job, whomever he/she might be. Perhaps it would be fitting if Jens Weidmann was given this poisoned chalice.

    Reply
    1. MisterMr

      AFAIK, minibots are supposed to be paper only, as the government basically hopes that people will just use those as banknotes.

      There is a precedent to this as, in the 70s, italian private banks issued “mini-checks” that were then in practice used as currency, however this happened in the context of a very high inflation as a result for a demand for more currency due to the increase in price, whereas minibonds come in a situation that is more or less the opposite.

      Also, mini-bots are not supposed to be legal tender, and are denominated in euroes, which means that they are not really a new currency (as to make them legal tender the government would be forced to either enforce convertibility at par or accept that the value of minibonds diverges from that of euroes, at which point receiving a 100€ banknote or a 100minibot banknote is not at all the same, which all the problem this causes).

      Reply
      1. MisterMr

        Wikipedia on the mini-checks (miniassegni):

        https://en.wikipedia.org/wiki/Miniassegno

        Wikipedia in english states that the cause for the lack of coins was a temporary technical problem at the italian mint, while the italian version of the page states that the problem was caused by excessive inflation (24% in 1975).

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        1. samhill

          I was in Italy at the time I was a teenager but I sure recall the bank script, it was pretty goofy, I was trying to collect all the exotic banks, and a lot of small stores simply gave you candy for the small change, but it was all for coinage, 50 and 100 Lira, akin to dimes and quarters. I don’t remember ever seeing 500 or 1000 Lira notes (akin to dollar and two dollar bills) which at the time were paper and had no problems, maybe someone can correct me. The rumor at the time was that the Italian coins, big and made of very nice stainless steel, were worth much more than their face value and were being scarfed up by the truck loads and sent off internally or to other countries to be made into more valued objects – Alessi cocktail shakers LOL. Again, beats me, likely improbable, but my experience goes with some sort of mint coinage problem rather than economic/monetary problems. It all ended as fast as it started too, which seems to rule out the later.

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    2. pebird

      It’s astounding that hotels, retailers, airlines and credit card companies (and soon Facebook), to name a few, can create their own parallel private currencies (loyalty programs) each with their own unique conversion rates and yet no economic catastrophe.

      But the state suggests to do something similar, and apparently there are challenging IT issues, logistic problems, and long time frames to implement.

      Reply
  6. MisterMr

    The big problem of the mini-bots is that they are not supposed to be “legal tender”: if my employer proposed to pay my wage in mini-bots I could refuse.
    Similarly, if I go to the supermarket, they have no reason to accept my minibots as payment.

    So we have a debt instrument that is euro-denominated, offers 0% interests, and the only ones who are forced to accept these mini-bots are the government and/or government agencies.

    In facts the plan is that the government will offer minibots to those businesses to which it is indebted instead than euroes, and those businesses (who are not forced to accept this because it isn’t legal tender) are suppesed to accept the mini-bots because the italian government is notoriously super-slow to pay its suppliers/creditors, so those creditors might prefer to have minibots now than to be paid in euroes a lot of time later.

    I expect the minibots, if they ever come to being, to trade at a substantial discount to euroes, let’s say 20%.
    Since the government is the only one forced to accept minibots at face value I expect anyone who can to shove back said minibots to the government as fast as possible, which means that tax recollection by the government will fall immediately.

    So I doubt this will work, unless the goverment goes the extra step and enforces minibots as legal tenders, at which point though it would be forced to enforce parity between minibots and euroes, which would cause other problems.

    It is as if, during the gold standard, a government resorted to print more banknotes, but mantaining the convertibility in gold.

    Reply
  7. Peter

    I hope the Euros demise is close. Living in Portugal, the population aside from the main cities like Lisboa or Porto lives on incomes about 1`/2 that of Germany and other more industrialized countries, but the prices in the supermarket or the department store are close to what I pay in Germany.

    An influence on prices, inflation through adjustments of the exchange rate is no longer possible. Lowering export good prices that are also used for the national demand cannot be adjusted any more to increase both export and inland demand.

    The policies of austerity after 2008 in those countries of the European South have bitten much harder than they have in much more prosperous central Europe.

    Europe’s northern and southern economies are on divergent paths, one that will make it increasingly difficult to function in the context of a common currency. Without an apparent solution in sight, the EU has been content to deal with each successive crisis as it comes up and postpone dealing with the long-term problem. In the meantime, the next European financial crisis is inexorably building.

    https://www.huffpost.com/entry/europes-next-financial-cr_b_10315364?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAACKrJOg-Ak737rCoV52Hy_KX10JG5XueEaQ1fRa_e9JweVVrRp02hiUoWnLrz_xlN0osYiRq_0_1HYIoo4LeDP6EUupNUt2UIHafMB2U4OAywTMETzhj8JBZYUlx4eqr7X1Ur2zshYnnYesYbzeRW-6yhegvR7tz3xpEOZEPwGtZ

    The general idea that a common currency can work without common fiscal policies as i.e. is working relatively well in Canada with transfer payments to help weaker economies in less developed provinces is just an idiocy that is almost unbelievable to ever have been attempted by any rational governments.

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  8. John Beech

    Germany as a predatory exporter strikes me as a funny turn of phrase for making excellent products for which many others will hock their souls. Italy can make good products for export. For example, there’s an Italian tool changer on one of my CNC lathes, and I utterly lust after another Ferrari. Meanwhile, I used to treat myself to Italian shoes but don’t any longer – but I don’t buy those from Germany (and certainly not China). I think we need to ask ourselves why the Germans are so obdurate with respect to currency. Experience with the Weimar Republic explains a lot. I don’t touch hot stove tops, either. Lots to be said for experience.

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    1. Synoia

      Canada and the US have mechanisms at the Federal level to recycle surpluses form sutplus states, to states which have defecits.

      There is much published on this topic. As I understad it, Germans and others refused to have such a mechanisn for the Euro zone.

      The Euro zone needs such a mechanism, to prevent the impoverishment of defecit countries, as does the whole world.

      If Germany was still on the Mark, its currency would appreciater, to resolve the issue. But as a member of the Euro zone it is getting a benefit of it surplus without any corrections.

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    2. Plenue

      ‘Superior German Enginnering’ is something of a meme, when it isn’t a flatout lie (as in the case of VW).

      As for Weimar, Germans are historically and economically illiterate about what actually happened then.

      Reply
  9. Summer

    Maybe the Italians could end up using the proposed “Libra” by Facebook instead.
    How would the Italian government feel about that? I know it’s not exactly the same thing as the proposition mentioned here. But if it happened: The government couldn’t create something like another type of currency that can be used in their country, but a foreign corporation would be able to.
    Again, I know it’s not exactly the same thing, but does contain some food for thought.

    Reply
    1. Briny

      You would still have the problem with external control/valuation of the currency, rather than sovereign control where, if necessary, the currency can be devalued. Even further if they are sane and consider a MMT derived policy.

      Reply
  10. Susan the other`

    Just wondering about the confluence of the miniBOT and oil to Italy from the Caspian via Russia’s South Stream. The map I saw shows a terminal in southern Italy in the Adriatic. And Russia, Syria and Turkey are holding tight these days. It’s strange that Russia isn’t coming to the defense of Iran. At least not yet. Because oil from Iran to all points east and north is easily as possible as the Saudi terminal in Israel. Except for the fact that nobody will invest in Iran and they are begging for investment, probably for this very purpose. One question is, if Italy starts to get some serious revenue from an oil terminal, or natural gas, will that be transacted in Euro or Bots? Just say Italy got richer than Germany – would the BOT be as good as gold then?

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  11. Oregoncharles

    ” The ECB and the European Commission, predictably, oppose the mini-BOT’s introduction, seeing it as an existential threat to the single currency and a means of avoiding the fiscal rules established at its creation.”

    But as Auerbach just explained, that’s exactly its purpose. Why else would any country bother? He thinks it’s a good idea because austerity and neo-liberalism are bad ideas, as most of us would agree; but let’s not pretend that the EU is wrong about that. In fact, I suspect that if they agreed to the mini-BOT, the Euro would be ended or radically transformed within a decade – over Germany;s protests.

    Why does this issue keep looking so much like an extension of WWII? (Admittedly, Germany and Italy were on the same side then.) And what keeps the Euro from CAUSING a new war in Europe? Which is one reason Germany spends so little on the military: nobody wants the Wehrmacht back in full.

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    1. Eustache de Saint Pierre

      My ex-army Dad who spent a few years in the early fifties stationed in Germany, answered my youthful question of would there be another European war ? with laughter then his assertion that from what he had seen of the US military in Europe, that Uncle Sam would never allow it .

      He had no time at all for the the EU’s boast of having kept the peace.

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    2. Synoia

      Actually it is appears as re-run of German Unification over much history, from the Holy Roman Empire to the Franco Prussian war, to WW I & WW II.

      One school of though is that a unified Germany is a natural Hegemony, which leads to European War.

      Reply
      1. Eustache de Saint Pierre

        Yes, post-war there were at least 2 plans to as it was put ” To stop Germany occasionally rampaging across Europe “, but the Marshall plan was finally decided on in order to keep the balance of Europe through ithe German role as economic powerhouse.

        Another option was the opposite as in an agrarian society, but the problem there was the amount of land they would need to support themselves in that event.

        As for Weimar, they appear to have forgotten that it was austerity measures that tipped the balance for Hitler. History will likely state that it was the populists who ruined the EU/ EZ, which IMO is like blaming the symptoms rather than the underlying disease.

        Reply
  12. Synoia

    Europe: where we will have​ to confront increasing hostility between nations and peoples….

    Sadly we have much experience in the results of such hostility.

    Reply
  13. Alar

    The article proposes (with references to other authors) that the problems of Italian economy are related more or less to having an inflexible euro as the currency (and the previous success being due to having a flexible lira). However, I think that slow GDP growth is more related to two other factors, that play a significant role in GDP growth – growth in population and government debt. First some numbers on births in Italy (from Wiki): last time 1 mio was born – 1964, 900 th – 1971, 800 th – 1975, 700 th – 1978, 600 th – 1983. This demographics might be part of a reason, why Italian economy was strong in 1980s, but started to weaken in 1990s when coincidentally euro was introduced. Secondly, government debt. In 1980 debt to GDP was 56%, by 1994 it had grown to 122% (https://www.ceicdata.com/en/indicator/italy/government-debt–of-nominal-gdp). This increase in debt definitely had a positive impact on GDP growth in 1980s and early 1990s. Afterwards (until financial crisis) it was in a downtrend – reaching 100%. That had definitely a negative impact on GDP. However, I’m not sure how much more debt could have increased further even if lira had stayed as the currency – it’s more likely that it would have been at similar levels and thus having still a negative impact on GDP growth (as the previous tailwind was lost). Concluding, I think Italian economy would still be very weak even if it had retained lira as a currency. And going forward, I don’t think that there will be improvement (irrespective whether lira was reintroduced, euro retained or miniBOTs applied) as the demographics is just so bad – current birth rate is below 500 th (449 th in 2018), which means that with life expectancy of 82,3 years, the population in long-term (without migration) would be 37 mio vs the current 60 mio – a 40% decrease from current levels (which is worse than Japan). It’s highly likely real GDP growth will be negative.

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  14. Tom Luongo

    It’s not that ‘bad money drives out good’ it is that ‘over-valued money is spent and under-valued money is hoarded.

    The euro will be hoarded and the mini-BOT will circulate for day-to-day economic activity. Euros will preferentially be used to deal with external debts/obligations. That’s the key to this and why Brussels is scared to death it will work.

    Reply

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