Italy at a Crossroads: to Leave or to Stay in the EU

Salvini’s game of irritating Brussels continues as Italy’s Deputy Prime Minister has recently proposed a dual currency for his nation. However, the EU is equally concerned about Salvini’s plan to launch a “fiscal shock” to Italy’s economy by proposing a flat tax of 15 percent. “We need a Trump cure, an Orban cure, a positive fiscal shock to restart the country,” he told one radio station.

The Daily Telegraph’s Ambrose Evans-Pritchard referred to him as the “master of Rome,” after he justified his plans for a dual currency by declaring “I don’t govern a country on its knees.” The Telegraph columnist is right – he may be Deputy Prime Minister, but Salvini is calling the shots.

Members of the Group of Fiscal Money produced an article for Politico which argued that an Italian dual currency is possible. They state that it could be used to avoid the uncertainties of exiting the euro, while allowing Italy to recover economically without breaking any EU rules. Boldly arguing that the downside of this proposal is “nearly nil,” the Group of Fiscal Money suggests this idea will enable the Government to issue transferrable “Fiscal Money” bonds, which bearers can use for tax rebates over two years. They could be exchanged against euros in the financial market or used in parallel to the euro to acquire goods and services.

Based on conservative estimates, Italy’s GDP growth throughout the two-year timeframe would generate enough extra tax revenues to offset the tax rebates. This would peak at approximately 100 billion euros per year, compared to Italy’s government revenue of more than 800 billion euros. The cover ratio (the ratio between government gross receipts and tax rebates coming due each year) would be substantial enough to accommodate for possible shortfalls due to future recessions. This all sounds plausible in theory, except that Salvini’s plan for a dual currency will fail if implemented.

To ensure that both currencies can coexist, euros would have to be used for cash payments, and half of all bank transfers would be conducted with a new currency. The lira’s value is lower than that of the euro’s. Instead of stimulating economic growth, people will exchange their domestic currency into hard euros, or move their savings abroad. People would have to maintain two accounts. As ZEW President Fuest said: “When two currencies compete in one country, the weaker one is always left with nothing.”

Nobel Peace Prize-winning economist Joseph Stiglitz suggests that the euro is flawed because it stole two crucial mechanisms Italy needs to tackle recessions: control over interest rates and exchange rates. It also introduced tight strictures on debts and deficits, which further harmed their economy. Weaker countries within the eurozone, like Greece, have suffered as a result.

Whilst a banking union would solve this problem in theory, Germany is opposed to further economic integration because it would reduce capital flight from weak countries. With Greece’s GDP plunging to 25 percent in 2015 after it chose to stay in the currency union, the most logical step Italy can take is to leave the eurozone, not implement a parallel currency.

A lower exchange rate will enable Italy to export more. Consumers will purchase Italian products, thereby stimulating demand and increasing government revenues. Growth will increase whilst unemployment decreases. As Stiglitz argues, the one way this can be achieved without economic and political costs is through debt restructuring. The US did this when it offset the gold standard.

A parallel currency only delays the inevitable: Italy’s eurozone exit. The consequences of this would be harmful in the short-term, but there is no reason why the Government cannot restructure Italy’s debt to ensure the political and economic costs of abandoning the euro are minimal. But a parallel currency will only favour the euro over the lira. It’s time for Italian politicians to realise their country’s future is unsustainable in the eurozone and that a parallel currency will change nothing.