economia · euro · politica

#MiniBots: a dangerous path to Italexit

Something very serious happened last week in Italy’s Lower Chamber: all political parties voted a non-binding motion about the repayment of the public sector commercial debts: this motion includes an explicit reference to the use of “Mini-bots” for repaying those debts, i.e. the issuance of additional bonds in small denominations. The trouble is that -in the intention of Claudio Borghi, chief economic advisor to Matteo Salvini, who introduced them in the Italian political debate a couple of years ago- those minibots are a way to facilitate the exit of Italy from the eurozone, because they could work as a parallel currency and possibly avoid bank runs.

It is amazing and worrisome that both Forza Italia and the Democratic Party voted in favour of this motion, without apparently thinking too much about this dangerous reference to the minibots, even if -as already pointed out- this motion is not legally binding.

And it is also the case that minibots -if introduced- could be not legally considered as legal tender, because EU Treaties explicitly state that the euro is the only legal currency within the European Monetary Union. Still, from a practical viewpoint the boundary between a minibond and a parallel currency would not be so clearly traceable.

How are minibots connected with Italexit?

The euroskeptical component of Salvini’s League is at the moment silent about “Italexit”, even if their leaders, i.e. Claudio Borghi and Alberto Bagnai talked about it so many times in the past years, often with virulent and/or stupid statements.

How do they justify this current silence? Because Italexit is not part of the coalition contract between the League and the Five Star Movement. And -to be fair- it was not included in the previous electoral agreement between the League and the other center-right parties in 2018. Still it is part of the League’s own manifesto, where the party claims to bring the EU back to a “pre-Maastricht” status, i.e. before the inception of the legal path that lead to the common currency. In the League’s manifesto the following statement appears (my translation):

The euro is the main cause of our economic decline: a currency that is tailored to Germany and multinationals, and contrary to the needs of Italy and its small enterprises. We have always seeked partners within the EU in order to initiate an agreed and shared exit procedure. We will go ahead with this, and in the meanwhile we will do everything to be fully and securely prepared in order to manage from a strong bargaining position our own requests to obtain back our [monetary] sovereignity.

And here we are:

Programma_Lega_pre_Maastrich

The idea is that this parallel currency made of “minibots” would minimize the transaction costs of eurexit, and in particular the probability and severity of bank runs.  Of course, bank runs are a very likely consequence of a situation in which Italian bank deposits will be converted into the new currency (new lira? Sestertius? You choose the name): who would like to lose -say- 30% of the value of his/her bank deposits, as compared to the euros you could spend elsewhere in the EU?

The supposedly “smart” idea to avoid bank runs during Italexit goes as follows: the Italian Treasury would have beforehand issued #MiniBots, i.e. small-denomination government bonds, from 5 to 100 euros, which pay no interest and which can be used to make payments to the state itself , for example to pay taxes. The initial issuance of these #MiniBots would take place with the aim of paying the commercial debts of the public sector, which -according to the last report of the governor of the Bank of Italy- should amount to about 64 billion euros.

According to their “inventor”, #MiniBots with a nominal value of 100 euros must necessarily be worth 100 euros, as the state commits to accept them as a form of payment like the euros issued by the ECB: this should encourage citizens to use them in their trades, and to pay off their debts. Even though the euro currency is the only legal tender, those minibots would resemble the legal tender exactly because citizens and firms can use them in their transactions with the state and other public entities.

What happens if and when Italy leaves the eurozone? So simple (maybe): the #MiniBots will temporarily become the currency with legal tender, so that -at least in the opinion of those who propose them- Italians could dispel the fears of being left without a day-to-day medium of exchange. And there won’t be even the need to secretly print the new banknotes, since – temporarily – #MiniBots will be used as the new banknotes. At this point the #MiniBots could “quietly” be traded against the euro at a market price (nominal exchange rate) that is likely to be below par, i.e. 100 #Minibots will be worth less than 100 euros: the new Italian currency will be devalued against the euro.

Still, within the minibot framework nothing is said about the bank deposits that remain denominated in euros: if I attach a high enough probability to eurexit, why should I refrain from withdrawing my savings in cash or transfer them to a bank account in another country, again with the purpose of avoding the devaluation of my deposits? How would minibots make a difference?

But -please- do think about this wonderful schizophrenic behavior of the #MiniBots! Before eurexit #MiniBots with a nominal value of 100 euros are worth 100 euros, while after eurexit they will be worth what the market will end up making them worth: in all likelihood much less.

To delve further into this, let’s think more carefully about the two functions that the #MiniBots should carry out before eurexit: they should increase the supply of money (or quasi-currency) in Italy, and therefore give the Italian economy a boost with an even more expansive monetary policy than the one the ECB has been implementing, and at the same time always be treated “on a par” the euro, due to the state’s commitment to accept them as a means of paying taxes. To put it briefly: more “currency” to go around that is worth like the euro, since the state accepts them to pay taxes.

Yet these #MiniBots have some flaws with respect to the euro: (i) they probably cannot be used outside Italy and (ii) citizens know that in case of eurexit they will be the new currency that will depreciate against the euro. You don’t need a PhD in economic theory or monetary economics to conclude that these two flaws make the #MiniBots strictly worse vis a vis the euro. So there is a push to supply #MiniBots (use them for transactions and demand the euro (i.e. keep them in your pockets or bank deposits): Salvini’s economic advisors might not like it, but the so-called Gresham Law always applies: “bad money drives out the good”.

Therefore, nothing rules out the possibility that a foreign exchange market will arise between the euro and the #MiniBots even before eurexit, unless the government wants to unleash the police and block any legitimate exchange of money (or quasi money) between citizens.

The easy objection to this argument starts from the fact that the state has commited to accept the #MiniBots to pay taxes. However, exactly because of the principle of “bad money driving out the good”, we must expect that citizens will mainly use the #MiniBots to pay off their tax debts: therefore the expansion of “money” on that side is partly reverted by the fact that citizens give back the #MiniBots to the state to pay taxes. On the other hand, in the commercial transactions with other citizens and companies, the higher the probability of eurexit, the less the #MiniBots will be worth on the market (more or less regulated) in which euros are exchanged against #MiniBots.

If we exclude the “police option” (law enforcement agencies that hinder the operation of the market in question), how can the state act to keep the exchange rate 1 to 1 at all costs? Here too, there is no need to have an interstellar knowledge of economics: if there is an excess supply of #MiniBot compared to this fixed 1:1 exchange rate, the state should intervene in this market by buying #MiniBots and selling euros, i.e., using its own euro reserves and decrease the amount of #MiniBots that are around. [Isn’t this ironic? we are talking about a fixed exchange rate!]

But -hey!- the initial goal of the #MiniBots was to increase (quasi) money supply. What happens? How come that the state ends up absorbing the initial supply of #Minibots?

Quite simply, the proponents of #MiniBots as a silver bullet have not noticed that -as it is often the case in economics- the blanket is too short: the 1:1 parity of #MiniBots with the euro is more likely to happen if the probability of eurexit is close to zero, while the mechanism breaks (the #MiniBots devalue on the black market against the euro) the higher this probability of eurexit and/or the more the state gets carried away and supplies an excessive amount of #MiniBots. And if the government wants to keep the parity of the #MiniBots with the euro at all costs, it should minimize the probability of eurexit (pretty ironic again) and it ready to intervene in the market by selling euros and buying #MiniBot, i.e. sterilising the initial increase in the supply of new “currency”.

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