Will Italian Mini-BOTs Kill The Euro?

Published by Philippe Herlin | Jun 13, 2019 | Articles 2794

About ten days after the European election, the European Commission, through its Commissioner Pierre Moscovici, announced a "debt-based excessive deficit procedure" towards Italy (oddly enough not France, which nevertheless suffers from a higher public deficit). As in response to this affront, the Italian Parliament voted - unanimously, it should be pointed out - for a motion to create "mini-BOTs", i.e. ordinary Treasury bills (Buoni Ordinaro del Tresorio) of low unit amount ("mini"), the level of a banknote, to be able to be used routinely. They would not offer interest and would have no maturity, which would assimilate them to traditional currencies.

These mini-BOTs would address a concrete and persistent problem: the Italian State has payment arrears of around €60 billion to Italian companies. Solving this debt would significantly increase the deficit and public debt, which Brussels prohibits. Hence the idea of mini-BOTs, which would be issued for the amount of this debt, paid to companies, which could then use it to pay their taxes, without affecting the "Maastricht criteria".

Then, this closed circuit (State-companies-State) could be expanded: companies could use these mini-BOTs between themselves, then to pay part of their employees' salaries and, thus, individuals could use them. These mini-BOTs would then become a real parallel currency. In this model, one mini-BOT = one euro, we would remain within the framework of the euro, even if this monetary creation would go against the European treaties that impose a single currency.

The next step would be to decree that one mini-BOT = one "new lira", for example, and that it be quoted on the foreign exchange market alongside other currencies, including the euro, to find itself in a dual currency system. The ultimate step would be to convert the euro holdings into the new currency overnight (one euro = one new lira). And here comes Italy out of the euro! Italexit is implemented. All this is fiction, of course, but the Italians have just decided to write the first page with this parliamentary motion.

There is just one small omission in this scenario: the Target2 balance. This compensation system between the central banks of the euro zone reflects the imbalances in the balance of payments between countries (when an Italian buys a Mercedes, this is reflected in a claim of the German Central Bank on the Italian Central Bank). The deficit is widening for Italy (500 billion euros) while the receivables explode for Germany (more than 900 billion euros), which would thus be the big loser of an Italexit! A cataclysm likely to blow up the single currency.

So, finally, maybe these mini-BOTs are only a means of putting pressure on Berlin - the real boss in Europe - so that the Italian government can slightly increase its budget deficit (which will remain lower than the French deficit, but nobody comes to bother Macron, less unruly than Salvini it is true). Or perhaps not; the Italians would already have made the decision to free themselves from the European currency, and they are going step by step. The coming months will be crucial, and the prospect of a new euro crisis, significantly higher than the Greek crisis in 2011, is increasing.

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Philippe Herlin  Finance Researcher / Doctor in Economics


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