Berlusconi’s New Lira Or Fiscal Money?

Enrico Grazzini

The former Italian prime minister Silvio Berlusconi has officially launched a project to issue a new national currency complementary to the euro as the ace to win the upcoming political elections. With his proposed New Lira, Berlusconi aims to strengthen the right-wing alliance between his Forza Italia, the anti-immigration and anti-EU Northern League led by Matteo Salvini and the post-fascist party Fratelli d’Italia of Giorgia Meloni. According to the polls, this alliance –still only under discussion – could (unfortunately) win the next general election expected in early 2018.

Even if Mr Berlusconi’s project of a parallel currency may be politically and electorally motivated, and even if a New Lira is a complete non-starter, the notion of issuing a complementary currency to get out of Italy’s liquidity trap could be innovative and might even work. Indeed, the Berlusconi proposal has fuelled a public debate not only in Italy but in the eurozone. This issue may well be at the center of Italian public debate in the near future for two important reasons: first, because those parliamentary elections are due by May at the latest and every party is preparing their manifesto. Moreover, Italian politicians fear that, with the end of the ECB’s Quantitative Easing program, the spread between the yields on Italian and German government bonds will increase and could become unsustainable. An economic and financial crisis is likely in Italy – and probably in some other peripheral country/ies in the eurozone – with the end of QE foreseen in 2018, potentially igniting another euro crisis.

The problem is that, despite the stabilization of the currency union as a whole, Italy is the one big country where the eurozone crisis never really went away. This is why the three most important Italian parties and coalitions – i.e. right-wing alliance, the Democratic Party, and the Five Star Movement – in one way or another have been highly critical of EU austerity, the Fiscal Compact and even the euro.

Berlusconi’s Project

Berlusconi has said: “We propose a national currency complementing the euro to revitalize consumption and demand, which are the key to sustaining durable growth in the country”. This New Lira should be given free to people and go side by side with the euro: it would be used for domestic transactions with the euro used for international trade. The Northern League proposes instead to issue some kind of state mini-bonds to be used as money, thereby replacing the euro and getting Italy out of the eurozone. Berlusconi wants the New Lira to be common ground for the next election manifesto of the right-wing alliance.

The problem is that he has presented his national currency as a new legal currency issued by the Bank of Italy. But the ECB has a full monopoly on currency in the Eurozone. Creating a new currency in Italy is illegal and would immediately lead Italy out of the eurozone. That is exactly what Berlusconi does not want (unlike the Northern League). It is not by chance that, after his announcement, the spread immediately increased and an EU spokesman said that “there is only one Eurozone legal currency, the euro, and there can be no exceptions.” Even Draghi said in answer to a question during his regular press conference: “I won’t comment on the Italian intention but I will comment on the Estonian decision (i.e. on the estcoin, the cryptocurrency projected by Estonia’s government): no member state can introduce its own currency. The currency of the euro zone is the euro.” So, the Berlusconi’s proposal for a new state currency is demagogic and inapplicable.

The Fiscal Money Project

On the left, the former premier Matteo Renzi, leader of the ruling Democratic Party, has proposed abolishing the Fiscal Compact and returning to the Maastricht treaty, so as to be allowed to surpass the prescribed 3% public deficit for three years and thus get the fiscal space to expand the economy. But it is unlikely that he will get the EU to concede any increase in Italy’s huge public debt (132% of GDP). The Five Star Movement, led by the blogger-comedian Beppe Grillo, is also evaluating the opportunity of renegotiating the EU treaties and/or issuing some kind of Fiscal Money to exit the liquidity trap without leaving the eurozone.More and more public debate centres on Fiscal Money, the proposal initially launched by Micromega, an authoritative Italian magazine. The Micromega project has been developed and promoted, among others, by respected Italian scholar Luciano Gallino, and some other intellectuals – including me.

Under this plan, the Italian government and Parliament would legally issue government bonds, i.e. Tax Discount Certificates (TDCs), that could be easily changed into euros and work as money and so increase aggregate demand. These new government bonds will not, however, increase the debt to GDP ratio. This is precisely the aim of the Fiscal Money project: issuing new money while remaining within eurozone constraints but also overcoming eurozone limitations.

The project envisages that the state will issue €30-40 billion – i.e. approximately 2-3% of the GDP – of TDCs over three years. TDCs are tradable securities that can be used to enjoy tax discounts after 2-3 years of the issuance. For example, in January 2018, the government might issue TDCs that will be usable for tax reduction only from January 2020-21 (two/three years after their creation). However, the TDCs will immediately increase the purchasing power of the assignees because they can be immediately converted to the euro on the financial markets, just like any other state bond.

Contrary to Varoufakis’ proposal of Fiscal Money, TDCs will be assigned free of charge and debt-free to families, business and public institutions; but they will not increase public debt thanks to their deferred maturity, the multiplier effect and the consequent GDP growth. In short TDCs will repay themselves (For further details, see here).

The basic concept is very simple: if you give water to those who are dying of thirst, they can start working again and pay for your water.

TDCs will be assigned to companies so as to reduce their tax burden. This will improve their competitiveness and keep in balance the commercial trade with foreign countries. They will be allocated to families in inverse proportion to their income, favoring disadvantaged social classes and low-income workers. The state may partially pay its suppliers with TDCs and so may get new resources to maintain welfare services and launch a job-creation programme and strengthen intangible infrastructure (healthcare, R&D, education, etc.) as well as building new physical infrastructure (e.g. energy saving, transport, etc.).

Thanks to TDCs, sovereignty, democracy and national unity will get far stronger and more vital. Therefore, it is desirable that not only Berlusconi but also other parties propose the issuance of a new kind of complementary money.