How would Italy’s ‘parallel currency’ work?

The Italian government is set to face off with the EU after threatening of launching a “parallel currency” in a riposte to calls for it to rein in its public spending programme.

Facing €3.5bn in fines from the EU for failing to tighten its fiscal belt, the far-right League which is part of the ruling coalition has adopted a strategy which “is to offer EU leaders a choice: reform the EU treaties to enable fiscal expansion and allow the European Central Bank to act as lender-of-last-resort; or face the consequences”, writes Ambrose Evans-Pritchard in The Daily Telegraph.

Fresh from an emphatic European election victory in which his party swept up nearly 40% of the vote in Italy, League leader and deputy prime minister Matteo Salvini struck a defiant tone, saying “I don’t govern a country on its knees”.

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His answer is to revive the threat of introducing so-called “mini-BOTs”, named after Italy’s short-term Treasury bills, which would act as a form of parallel currency in competition with the euro.

Reuters says the Treasury “would print billions of euros of non-interest-bearing, tradeable securities which could then be used by recipients to pay taxes and buy any services or goods provided by the state, including, for example, petrol at stations run by state-controlled oil company ENI”.

Claudio Borghi, Lega chairman of Italy’s house budget committee and long-time critic of the euro, said the plan for minibot treasury notes is written into the coalition’s solemn “contract” and will be activated to flank the tax reform package.

“It is a way to mobilise credit that is badly needed and put money into circulation,” he said.

“This scrip paper creates parallel liquidity - akin to what [former Greek finance minister] Yanis Varoufakis wanted to do in Greece - to be used to pay €50bn of arrears to state contractors and households”, says Evans-Pritchard.

“Once these short-term notes trade on the open market they would become a de facto currency, a new lira in waiting. Italy would have a split monetary system. The euro would unravel from within,” he writes.

Supporters of the plan say it will “finally resolve the intractable problem of the state’s outstanding bills, which has weighed on Italy’s economy for years. They say that by providing money for consumers to spend and companies to invest, it can give a major boost to the country’s sluggish economy”, Reuters says.

However, “the impact on public finances is disputed” says the news agency. “Critics say it will raise Italy’s public debt, already the highest in the euro zone after Greece’s.”

“Italy might be able to use mini-BOTs (or let’s be honest and call them the new lira) to finance deficit spending without breaking eurozone rules” John Mauldin said in Forbes last summer when the idea of a parallel currency was first touted.

“This could ultimately debase the euro and blow apart the eurozone. Germany would have to leave. From there, you can draw your own map,” he added.