London (CEBR, Francesca Biagini ) – Since the UK voted to leave the European Union in 2016, there has been a great deal of attention on which country, if any, may be next. In these discussions, Italy often comes up.
At the moment, the European Commission is considering taking legal action against Italy over budget violations. For some time, the government has failed to comply with the Maastricht criteria, running a public debt to GDP ratio well above the suggested 60% (in 2018 it amounted to 132%). To make matters worse, with the reforms recently announced by the Italian government, the Commission also expects the public deficit to rise making it impossible for the country to reduce its debt as agreed. The difficult financial situation is further strained due to an economic performance once again in decline. If the EU decided to go ahead with legal action and the Italian government doesn’t agree to change its fiscal proposal, unprecedented sanctions will be imposed with various repercussions for Italy.
In this worrying context, the new government is looking for alternative ways to circumvent the EU’s budgetary rules. One idea coming from the government’s far right wing is the introduction of Mini-BoTs. Mini-BoTs would be designed as small, non-maturity and non-interest -bearing government bonds. In other words, a new parallel currency. The idea is only relatively new in the EU as a form of parallel currency has already been advocated by Greece’s Yanis Varousfakis and long supported by Italian Lega Nord.
Although the government hasn’t formalised any proposal around the circulation of the new currency, a motion recently approved by the parliament indicates that it would be used by the government to repay the public administration debt (estimated at over €50bn in 2018). This is debt that the government accumulated with its suppliers, mostly corporates. If that was the case, it might mean that Mini-BoTs will only be accepted in transactions with the government.
Mini-BoTs would be a form of selective taxation in the sense that private creditors will be paid by the government in Mini-BoTs and will have to wait for the next transaction with the government, such as a tax payment, before they can use the parallel currency. This indicates that small creditors would lose the interest that would have otherwise accumulated between the moment they receive the Mini-BoTs and the moment they spend them. Essentially, the government would decrease its debt at the expenses of a part of its population. It is true that creditor companies would receive some relief via paying artificially lower taxes with some beneficial impact for the economy. But again, these taxes are money that the government owes them.
Perhaps the main concern is that, despite the current limited ambitions, Mini-BoTs could go from a parallel currency to paving the way for Italy to abandon the Euro altogether. While some might welcome the opportunity to regain Italy’s historical export competitiveness through devaluation, this move would not only lead to Italy’s exit from the Eurozone (‘Quitaly’), but put the very existence of the currency in jeopardy.