Why Issuing Fiscal Money Could Help Exit The Italian (And Eurozone) Crisis

Enrico Grazzini

Fiscal Money is the most suitable instrument – and perhaps the only one – to overcome Italy’s serious and enduring crisis. The Fiscal Money project can be implemented both in Italy and other Eurozone countries to exit the liquidity trap by increasing aggregate demand. It can also help tackle the weakness of the Italian banking system which is stuck with a large amount of Non-Performing Loans (of around € 360 billion gross).

But first of all: what is Fiscal Money? This is not legal tender or a parallel currency but a financial instrument. By Fiscal Money we mean a euro-denominated bond issued by the state or a public (or semi-public) institution, covered by its fiscal value (i.e. valid for tax discount), maturing more than one year from issuance, but immediately negotiable on financial markets and so immediately convertible into legal currency. Fiscal Money is a bond fully guaranteed by the state as a tax rebate, even if non-refundable in euro by the state: in this way it does not increase public debt.

This bond is valid “to pay taxes ” only after a reasonable period of time, certainly more than one year from issuance. In fact, if the Fiscal Money were immediately used, then it would be like to a simple tax cut, but that would cause an immediate public deficit. Instead, thanks to its extended maturity of 2-3 years, Fiscal Money can be immediately monetized and can quickly increase spending power. Fiscal Money, as a matter of fact, advances the value of future tax revenues. So it becomes the oxygen required to exit the liquidity trap, to increase income and create new wealth thanks to the Keynesian multiplier.

There are several versions of Fiscal Money. The following are the two most important versions.

1. Tax Discount Certificates (TDCs) are bonds for tax credit issued by the state and allocated for free to households and businesses; they are also used by government administrations as a means of payment. Their issue would have a huge economic and political impact. The issuance of these free government bonds would be comparable to a kind of helicopter money (see Milton Friedman, J. M. Keynes, Ben Bernanke). In fact, thanks to the issuance of this bond, the state can immediately increase the spending power of families, businesses and public administrations. It can increase demand and restart the economy, unchaining it from the liquidity trap. In order to increase consumption, this “free money” would be distributed to families in inverse proportion to income; and it would be allocated to firms in proportion to the number of employees so as to reduce the cost of labor and increase business competitiveness. In order to increase employment (and also private investments), the state can use TDCs to pay for new public works. A Mediobanca Securities report asserts that, thanks to TDCs, Italian GDP would grow twice as fast, while preserving the level of the public balance and the balance of trade. The TDCs will be sold by those (businesses and households) who need cash and will be purchased by those (businesses and households) which want to get tax discounts. The TDCs would be converted into euros and quickly spent: so the economy would enjoy new air. Thanks to economic growth, the debt/GDP ratio would decline. The state could increase cash in circulation in the real economy, boost consumption, counter the credit crunch, boost investments and jobs. The challenge is that the Keynesian multiplier will increase GDP insofar as the future fiscal revenues will offset the tax deficit that ceteris paribus will be generated by the issuance of the TDCs (see here).TDCs are not refundable in euro by the state: so, they do not constitute a financial liability for the public purse according to Eurostat criteria. Moreover, we foresee that TDCs will impact the economy in a very positive way, assuming that the fiscal multiplier exceeds one when (as currently in Italy and in the Eurozone) capital and labor resources are greatly underutilized.

2. Bonds issued by the Cassa Depositi e Prestiti with the option to be converted into tax rebates. The Italian Cassa Depositi e Prestiti – which is a non-state company from a legal point of view, even if it is 80+ percent owned by the state – could get new resources to develop the Italian economy without increasing government debt. This version of Fiscal Money provides that CDP signs an agreement with the fiscal authorities and issues bonds maturing in the long term (eg. 10-20 years) with the option that in certain time slots they can be converted into tax rebates at their nominal value. The CDP bonds would not worsen the public budget because CDP sits outside the scope of government accounts. The bondholders would be fully guaranteed by the tax value of the CDP bonds, while the state would get credit from CDP for the bonds converted into tax rebates, and thus would not worsen its deficit. Thanks to these convertible bonds, CDP could collect some billion (or some tens of billion) in the financial market at low cost. CDP could use these new resources to implement industrial policies and to backstop the banking system. For instance, CDP could provide guarantees on non-performing loans. Similarly, the Caisse des Dépôts et Consignations in France and the Kreditanstalt für Wiederaufbau in Germany, with an ownership structure similar to that of the CDP, and other national development banks could issue this type of Fiscal Money to give a boost to the overall domestic economy.

Of course, each of these Fiscal Money versions has some critical points. But one thing is for sure: it is vital to stimulate new demand and create new resources to make an early exit from the liquidity trap. In Italy it is already past midnight.