Submitted by Taps Coogan on the 14th of June 2019 to The Sounding Line

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A great deal is being made of Italy’s plan to issue a parallel ‘currency’ to the Euro called the ‘mini-BOT.‘

The concept works like this: the Italian government would issue a small denomination, non-interest bearing, non-expiring promissory note that can be used to pay taxes in Italy. The government would use these mini-BOTs to pay some of its bills instead of using Euros. That would allow the government to continue to grow its deficits beyond the budgetary constants of the EU and beyond Italy’s ability to issue more Euro denominated debt at low interest rates.

For those familiar with the definition of a banknote, the mini-BOT should sound very familiar because it is practically the same thing, with one important difference. In all modern economies, governments are not allowed to create banknotes (money). That privilege is reserved for central banks. That is why treasury bonds are not currency, but banknotes are. That way, governments cannot ‘print’ money and directly inflate the currency to pay their bills. Instead, governments must borrow money from investors and repay them. That means that government deficits don’t add to the money supply (in theory). With the mini-BOT however, the treasury bond itself would be ‘money’ and thus the Italian government could directly print as much ‘money’ as it wants.

Translated, the mini-BOT is a plan to finance large government deficits, in an extremely indebted country, by printing money in a directly inflationary fashion.

Mini-BOTs would not be accepted as payment for Italy’s existing external debts, so Italy would still have to pay that debt back in Euros. All of which begs the question: who will the Italian government be paying with soon-to-be-worthless mini-BOTs? Pensioners? Government employees? Companies that provide goods and services to the Italian government?

Furthermore, every mini-BOT that the Italian government prints is a mini-BOT that it will get back in taxes in place of the real Euros that it needs to pay its very real debts.

The mini-BOT will not alleviate the pain of repaying Italy’s debts or of defaulting on them. It will simply transfer that pain to anyone who is getting paid in mini-BOTs.

What’s Wrong with Italy’s Economy?

The Euro has not helped Italy’s economy. Neither have the extra layers of regulation that come with being in the EU and Eurozone. However, the tax, regulatory, and monetary policies for which the EU is so often criticized can be found in greater abundance in Italy than anywhere else in the EU.

Italy has the fifth highest overall tax burden in the world and has the second highest payroll tax rate among developed economies. It ranks a dismal 79th for economic freedom, the second lowest in the developed world and below the likes of Kyrgyzstan. It ranks 49th for economic competitiveness and 45th for business friendliness.

With an average age of 47 and rising, Italy is one of the oldest countries in the world and the population is shrinking. Italy suffers from the lowest ratio of workers to elderly in the developed world with barely 1.5 workers for every person over the retirement age. As if that isn’t bad enough, Italy’s new government has lowered the retirement age to 62 despite the fact that Italians enjoy the third longest lifespan in the world.

As for the supposed austerity that Italy has endured, Italy’s government spending has increased every year since 2010, both in absolute value and per capita, and Italy’s deficit-to-GDP is 33% larger than the EU average. The ECB has pumped money into the Italian financial system faster than the entire Italian economy has grown for years. In fact, the ECB has been the largest single net buyer of Italian government debt since the Euro was created. Relative to its economy, Italy has been the third largest beneficiary of quantitative easing in the world after Japan and Switzerland.

Italy’s economy is struggling because it’s poorly managed, deeply indebted, and structurally uncompetitive. Instead of tackling those problems head on, Italy continues to indulge in the fantasy that even bigger deficits and a worthless new currency will save it. They won’t.

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