A solution to imposed austerity?

In an interesting article actually written before the collapse of the Genoa flyover a group of Milanese Italians promoting ‘Fiscal Money’ suggest that Italy should introduce its own parallel currency in the Eurozone. ” Rome can regain control of its monetary policy without breaking the rules of the eurozone.”

They continue:

Our proposal is for government to issue transferable and negotiable bonds, which bearers can use for tax rebates two years after issuance. Such bonds would carry immediate value, since they would incorporate sure claims to future fiscal savings. They could be immediately exchanged against euros in the financial market or used (in parallel to the euro) to purchase goods and services.

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 on labour. These allocations would increase domestic demand and (by mimicking an exchange-rate devaluation) improve enterprise competitiveness through a reduction in the cost of labour. As a result, Italy’s output gap — that is, the difference between potential and actual GDP — would close without affecting the country’s external balance.

They go on to admit that the scheme is devised so as to comply – well really get round – the regulations:

Note that under Eurostat rules, Fiscal Money bonds would not constitute debt, since the issuer would be under no obligation to reimburse them in cash. Also, as non-payable tax assets (of which many examples already exist), they would not be recorded in the budget until used for tax rebates — that is, two years after issuance when output and fiscal revenue have recovered. [And] …. a non-payable liability does not bear any default risk due to the lack of repayment capacity from the liability issuer.

Based on conservative assumptions, we calculate that Italy’s GDP growth over the two-year time period would generate additional tax revenues sufficient to offset the tax rebates.

….In any case, safeguards would be provided within the law governing Fiscal Money to ensure Italy’s full compliance with EU fiscal rules. Such measures would consist of spending cuts and/or tax adjustments that would be triggered automatically in the event of fiscal underperformance, compensated by additional issuances of Fiscal Money in favour of those who would be otherwise hit by the fiscal adjustment.

They think that this might be a solution for the whole Eurozone. I think they could be right.

I very much hope it is taken up.

It also happens to demonstrate what could be done by local authorities – or devolved governments – in the UK .

My previous suggestion had always been that local currency should be issued as a substitute for pounds sterling but I see now that local authorities could also issue bonds or just ‘dated’ currency as a supplement to existing expenditure (itself due to be slashed even further in coming years.)

If, for example, local authority social workers in one council area were given bonds for free which could pay for council tax the following year they would all have more money to spend because they were not having to allocate part of their income for council tax.

If you did the same for firemen and housing officers, public health inspectors, trading standards people and so on it would soon be the case that other council areas would need to compete to retain employees and would need to adopt the same methods. It would favour local companies if every council subcontractor received a top up enabling the payment of local council tax – something the big corporations, coming from ‘out of area’ would probably find more difficult to use.

And once councils get confident they could probably issue them to local NHS staff.

Of course we’d end up with lots of local currencies but if that is the price of reinvigorating local democracy and regaining local control then that is an inconvenience well worth paying. We, locally, would actually be taking back control.

In a couple of years this could even put paid to austerity, couldn’t it?