OnPoint Subscriber Exclusive

The Big Picture brings together a range of PS commentaries to give readers a comprehensive understanding of topics in the news – and the deeper issues driving the news. The Big Question features concise contributor analysis and predictions on timely topics.

italy_bp_FILIPPO_MONTEFORTE_AFP_Getty_Images

Toward Another Eurocrisis?

Jun 2, 2018

This week in Italy, the populist Five Star Movement and right-wing League party's attempt to form a government initially collapsed when President Sergio Mattarella rejected the coalition's Euroskeptic nominee to head the ministry of economy and finance. With the populists having now satisfied Mattarella’s concerns, is Italy heading for a break with the eurozone?

In this Big Picture, Harold James explains how Italy's populists might bring their country – and the European Union – to the cliff's edge by deploying a "madman strategy" of diplomacy. And even if the new government does not use brinkmanship to extract concessions from the EU in the near term, Nouriel Roubini and Brunello Rosa explain why an “Italexit” could grow more likely over time.

Meanwhile, Lucrezia Reichlin delves into the economic factors underlying the crisis, and points a finger at Italy's broken growth model. And Carmen Reinhart shows how Italy's massive sovereign debt has compounded its economic problems and made the current situation all the more dangerous.

To continue reading, register now. It’s free!

Already have an account? Log in

new comment has been posted. new comments have been posted.

0 Comments on this paragraph, 4 Comments on this article

Mauricio Duran-Loriga Jun 4, 2018

Italy has primary surplus, so they can default on their foreign obligations any day.
Should Italy come to default on its foreign debt, fear would switch camps and the Germans would have a massive banking crisis, deeper than their 2000 dot.com tragedy.
By no means Italy will go through a Greek Odyssey. Those who give a chance to a Target2 repayment are totally unaware of the situation.
It is easier for Italy to exit the Euro than for Germans to foot the Italian bills out of their stingy wallets.
A new reply to this comment has been posted.
Avraam Dectis Jun 3, 2018

.
Proper leadership and policies could quickly bring widespread prosperity. That should be the first choice.

The second choice is a southern eurozone, more amenable to proper policies.

Tangentially related, to capital flight issues:

.
___Currency_Transfer_Securities___(CTS)___
.
Supporting domestic industries and maintaining currency values are two international economics problems that require better solutions.

Supporting domestic industries with tariffs and subsidies is both banned and contentious.

Maintaining currency values with Interest rate rises, central bank currency purchases and crude currency controls can be counterproductive and untenable.

Both of these problems can be addressed by Currency Transfer Securities (CTS).

CTS is implemented by a Balanced Currency Transfers law.

Balanced Currency Transfers Law ( BCTL):

1) The act of transferring currency out of the country creates a Currency Export Security (CES) notating the amount exported. This security is taxed at a percentage of the value of the transfer. That percentage, X, will be set and adjusted as necessary, by the Central Bank.

2) The act of transferring currency into the country creates a Currency Import Security (CIS) notating the amount imported.

3) The tax paid on the CES can be refunded by holding an equivalent amount of CIS.

4) All CIS and CES will be recorded by a central entity to facilitate trading.

For example: if X were a very high 50%,

1) if Currency Exporter A exported a trillion dollars in currency, they would be taxed 500 billion dollars and also accrue a 1 trillion dollar CES.

2) If Currency Importer B imported a trillion dollars in currency, they would accrue a 1 trillion CIS.

3) A would desire to have his tax refunded. If he could induce B to sell him his CIS he would be able to get a full refund.

4) If A could only get B to part with 800 billion in CIS, he could only claim back 400 billion.

Why does this work?

There would be a market in CTS.

If goods imports exceed goods exports, the supply of CIS will be exceeded by the supply of CES, which will cause the price of CIS to rise and therefore make goods exporting more profitable.

Conversely, if goods exports exceed goods imports, the supply of CIS will exceed the supply of CES, and the price of CIS will drop, providing little benefit to the goods exporter.

Thus you have a self regulating explicit mechanism to keep currency flows balanced and, when necessary, an implicit mechanism to support exports.

The above assumes that goods exports to cause currency to be imported and goods imports to cause currency to be exported. This is not always the case and other forces can cause currency transfers, but currency flows are a good representative substitute for goods trading.

CTS would work for many countries but is not a universal solution. It has to work with that country’s larger role. It may work far better in a Bond Funded Government model where the lack of income taxes would not diminish the desire to repatriate profits.

If the CTS implementation includes not just currency imports and currency exports but also conversions to another currency, that has the side effect of making currency trading much more risky. Such moves as currency traders breaking a central bank would be much more risky and, possibly, impossible. With currency traders sidelined, changes in currency values would reflect genuine economic activity.

Not all transfers should be securitized. Sums small enough to fund a reasonable vacation might be excluded, to avoid negatively affecting the average vacationer. Everyone would get an annual exception for personal travel.

The potency of CTS varies directly with the size of the tax on currency exports. This attribute allows easy adjustments to achieve the desired effect. Implementation could start with a currency export tax of one or two percent.

CTS is an elegant solution that can be efficiently implemented at financial institutions. It solves many problems that have been inadequately addressed.

Possible Scenarios:

The exact effect of CTS is difficult to predict because the effect depends on psychology as well as profit motive. These are some possibilities.

Goods exporter accrues significant CIS and of course wants to maximize their value. If they thinks the central bank will raise X, thus increasing the value of CIS to owners of CES, they may decide to withhold the CIS from the market. Alternatively, if they need cash flow, they may seek the best immediate deal.

2) Goods importer accrues significant CES and wants to maximize their refund. If they think the central bank might raise X, they are likely to sell for the best immediate price, since in the future they could be outbid for the available CIS. Conversely, they might wait if they expect X to decrease or if exports relative to imports are increasing.

3) Foreign entity wants to import currency for investments. They receive CIS. Essentially they receive a boost in the value of the transfer, if they immediately sell the CIS. Repatriating the money will cost them X, so the expected movement of X may affect their decision.

4) Goods importer pays foreign seller by depositing cash in their USA account. No CTS issued.

5) Goods importer pays foreign seller with offshore funds. No CTS issued.

6) Disgruntled countries complain to WTO. WTO cannot do anything since BCTL is not necessarily affecting trade, as seen in example 3, 4 and 5. But, ultimately, any funds in the USA that a foreign entity wishes to receive will, ultimately, accrue CES.

6) Central Bank notices that imports far exceed exports and that even though the economy is generally good the exporters are struggling. They raise X and perform economic Jiu Jitsu, transferring some of the goods importing energy to the exporters. Export industries hire people and the economic benefits of the robust economy are more widespread.

7) Central Bank notices exporters doing fine, economy fine, everything fine, drops X to close to zero.

8) Central Bank notes the currency is under attack by currency traders and raises X significantly. This alone makes the attack more costly if the traders are borrowing the local currency and using it to buy foreign currency. Central Bank may even disallow refunds of CES to large scale currency traders. Raising X may cause a capital inflow as foreign capital seeks to accrue now more valuable CIS, thus raising the value of the currency, foiling the attack and inflicting losses on the traders. Raising X essentially recruits another group of foreign exchange traders to work against the attacking foreign exchange traders.

The full set of possible dynamics might be difficult to predict. These are just a few of the obvious examples.
.
A new reply to this comment has been posted.
global bust Jun 2, 2018

you people are starting to frighten me with your nearly ubiquitously errant usage of the term 'populism'. call it anti-corporate if that's what it is. i know you don't like to imagine such realities. but the wealth gap increases nonetheless under your vaunted system and in truth nobody cares as long as 'indicators' rise. the system is a fraud. with all due respect.
A new reply to this comment has been posted.

https://prosyn.org/ViKcRtU;

OnPoint Subscriber Exclusive

Toward Another Eurocrisis?

Featured in this Big Picture

To continue reading, register now. It’s free!

More
PS OnPoint

New Comment

Contact us

Log in/Register

OnPoint Subscriber Exclusive

Toward Another Eurocrisis?

Featured in this Big Picture

To continue reading, register now. It’s free!

More PS OnPoint

Edit Newsletter Preferences

Set up Notification

More
PS OnPoint