Italy ' s Macroeconomic Problems Cannot Be Remedied By Issuing a Domestic Quasi-Money

The Italian general elections of March 4, 2018 have produced an improbable coalition government between two upstart populist parties: left-Eurosceptic-nationalist Movimento 5 Stelle (Five Star Movement) and the right-Eurosceptic-nationalist Lega (League). The coalition partners agree on greater public spending and, at the same time, on tax cuts that would reduce revenue. How then to pay for the additional spending? Italy is already highly indebted. Its publicdebt stands at 133 percent of GDP, highest in the Eurozone apart from Greece, and well above the EU ’s average of 87 percent. Its sovereign bonds carry a high default risk premium. Today, the yield on Italian 10-year bonds stands at 291 basis points above the yield on 10-year German bunds, up from a spread in the 130-40 range during the months before the election.If tax revenue and debt cannot practically be increased, the remaining fiscal option —for a country with its own fiat currency—is printing base money. But Italy is part of the Eurozone, and only the ECB can create base-money euros. A group of four Italian economists (Biagio Bossone, Marco Cattaneo, Massimo Costa, and Stefano Sylos Labini), correctly noting that “budget constra ints and a lack of monetary sovereignty have tied policymakers’ hands,” and regarding this as a bad thing, have proposed in a series of publications thatItaly should introduce a new domestic quasi-money, a kind of parallel currency that they call “fiscal money.” Similar prop...

Source: Cato-at-liberty - September 6, 2018 Category: American Health Authors: Lawrence H. White Source Type: blogs