What would a parallel currency look like in Italy? Would it be like Norway and Denmark etc? Or would it be a bad idea?
When former Italian Prime Minister and current candidate Silvio Berlusconi told the Italian publication Libero Quotidiano on August 19 he would like to see a dual Italian / euro currency, it caused “some market concern,” an HSBC report noted. The concept has met with mixed reviews. MarketWatch London Eye Columnist Matthew Lynn said “Italy’s economy could soar,” while bank analysts such as HSBC’s European Economist Fabio Balboni pours cold water on this notion. In an August 23 report, he explains why the concept wouldn’t work and is likely more a populist political gesture than a serious economic proposal.
A parallel currency is politically popular in Italy
With Italian youth unemployment running near 40%, endless amounts of migrants coming on shore, and its economy registering zero average annual growth since combining its currency with economic powerhouses Germany and France two decades ago, there a disgruntled populist strain in Italy that hasn't gone away, polls show.
With an election season approaching – the latest new elections must be called before May 15, 2018 – a neck-and-neck race between the mainstream Democratic Party and the populist Five Star Movement is in the offing. In a distant third in the polls is Berlusconi's Forza Italia party closely followed by the right-wing Northern League.
HSBC's Balboni speculates that Berlusconi’s advocacy of a parallel currency as more a move to garner populist support and potentially unite right-wing populist parties before the expected early 2018 elected. A Recent analysis by Citi pointed to nearly two-thirds of Italians supporting a parallel currency.
With its “banking system close to collapse, and poverty rates soaring,” MarketWatch's Lynn thinks a national currency whose value is tied to its regional economy is what is needed to lift the Mediterranean nation out of economic malaise.
“A parallel currency could provide an elegant exit from the euro, maintaining some of the advantages of the single currency, while freeing the country from endless recession,” he wrote. “If it ever gets off the ground, Italy could quickly become one of the most attractive economies in the world.”
If it had its own currency, Italy’s exports, in theory, would be less expensive compared to that of Germany. By combining with the EU, however, Italy can borrow money in international debt markets at a lower cost than it could on its own.
HSBC says a parallel Italian currency is not feasible, could lead to banking crisis
Such plan to create a parallel currency is but a pipe dream, Balboni points out. Although Berlusconi claims that it can be done legally through existing treaties, Balboni disagrees, pointing to the electorical complexity that will not be solved by one election.
“A referendum on the euro is not even allowed by the Constitution, and changing the constitution might require a referendum in itself,” he wrote. “The possibility of leaving the euro is being used by parties to gain votes among disenchanted voters.”
Even if threading the political needle could be accomplished without legal issues, it isn’t likely to work on a practical basis, Balboni asserts. He says the arguments used in 2015 when Greece wanted to exit the euro currency union still apply.
“Printing more of the new currency could simply lead to higher inflation and currency depreciation, making it hard to maintain a fixed exchange rate between the ‘weak’ and the ‘hard’ currency, or revert back to using just the euro,” he wrote, pointing to a potential banking crisis should the idea even be attempted. For instance, nervous Italians could withdraw their deposits in euros, leaving a run on the store of value currency where “the ECB would be put in an increasingly difficult situation politically to provide liquidity to Italian banks.”
Then there is the issue of paying debts. Could Italy pay its debts in its own currency, which it can print at will?
Financial Times columnist Izabella Kaminska put the situation in perspective:
Who collects the taxes (and in what currency) will also sway events. In that regard, the point might be made that euro-denominated bank debt is a type of private-sector tax. After all, if international banks are owed euros by Italian debtors, Italians will need to get their hands on euros to satisfy those liabilities — something that could prevent the popularisation of a parallel unit that fails to keep its value in check with the euro debt in hand.
As powerful as they are, international banks don’t (yet) have the right to use violence, coercion or force against indebted states.