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In its report on the European economy, CESifo – one of the most highly reputed economic research centers of Germany – devotes some considerable space to our Tax-Credit Certificates (TCCs) proposal to revamp the Italian economy (pp. 68-70).

TCCs represent one form of what we have elsewhere termed as Fiscal Money.[i]

The report criticizes our proposal but contains several critical errors and misrepresentations of it and fails to capture many of its important features. While we have repeatedly asked Prof. Clemens Fuest, president of the ifo Institute, to give us right of reply and let us address the report’s criticism, he has declined our request. It is regrettable that those who preach “virtuosity” in the realm of financial and fiscal rules become stranger to it when it comes to the most basic rules of intellectual ethics, amongst which is the disposition to open debate.

In what follows, we point to the report’s errors and misrepresentations and offer our counter-deductions. But before doing so, we should notice a serious omission from the report itself. In making reference to the historical precedents of our proposal, and noting that “they have a mixed track record,” the report conspicuously overlooks the precedent of greatest success and one of the truly forgotten lessons of Germany’s economic history – Hjalmar Schacht’s MEFO bills. Schacht’s quasi-monetary solution actually saved Germany from the Great Depression of the 1930s. Through it, as President of the National Bank and Minister of Economics of Germany, he was able to stimulate domestic production and to eliminate unemployment at very moderate inflation, putting an end to the years of economic strain that his country had to suffer from the Treaty of Versailles’ reparation commitments. Yet, while the macroeconomic vision underlying Germany’s contemporary approach to macroeconomic policymaking is usually traced to the paradigm developed by Walter Eucken (1891-1950), the immense value of Schacht’s historical undertaking has been lost from memory. The authors of the CESifo report should not have missed this good opportunity to redress this still missing major record of their country's history.

We also notice that, as per own admission by the authors of the report, their analysis of the TCC proposal is largely based on an article by an associate of the Bruegel Institute, which lies probably at the origin of the report’s many misunderstandings and inaccuracies regarding our proposal. Yet, we wonder why the authors have analyzed the proposal using secondary sources, when its originator – the Group of Fiscal Money – has produced on the subject a considerable amount of materials (also available in English).

Moving to our counter-deductions:

  • First, CESifo states that*“the program would stop after four years”*. This is not the case. Issuances of TCCs would grow gradually until they reached a ceiling on the third (not the fourth) program year, but they would then continue at the level required to attain maximum output and labor employment consistent with price stability. TCCs would be allocated, free of charge, to fund public investments and social spending programs, supplement employees' income and reduce businesses' tax-wedge (the difference between before-tax and after-tax wages) on labor. These allocations would increase and sustain a higher level of domestic demand (through the income multiplier and the investment accelerator effects) and improve business competitiveness. As a result, the domestic output gap would close without affecting the country's external balance. TCC issuances can be flexibly modulated as circumstances require – if the economy improves, their issuances may decline or even be suspended. However, the program would continue as long as necessary, and the TCCs, as an instrument, would always remain available for being used by the fiscal authorities if and when needed.
  • Second, the report states that, “The authors of the proposal argue that although there will be no legal obligation for private parties to accept payments in TCCs in exchange for goods and services, this may happen if payment infrastructure allows for their circulation as electronic securities. The motivation behind the idea of using electronic form for TCCs is not explained. One possibility is that in this way they would be less likely to be treated as a parallel currency by the ECB than if they were in paper form…However, they would also be more readily used for criminal activities…”. The idea of issuing TCCs in electronic form is based exclusively on considerations of safety and efficiency and has nothing to do with ECB decisions, since the issuance and use of the TCCs would not violate the ECB’s monopoly on the euro. As regards the use of TCCs for “criminal activities,” they could circulate in a payments infrastructure that would be protected by existing international standards and would therefore be as safe and robust to risks (including criminal activities) as any contemporary state-of-the-art payments system in the world.
  • Third, the report states that, “while the issuer is committed to redeem these securities, the redemption is not against the money (euro) and is, therefore, of lower value than standard BOTs”.**[ii]**The authors of the report neglect a key point of our proposal. True, TCCs do not give holders a claim to receiving euros but only future tax rebates. Yet, both BOTs and TCCs are denominated in euros and, economically, a claim to receiving an amount of money would be identical to a claim to not paying the same amount of money (except that, from a legal and accounting standpoint, the former raises debt obligations for the issuer while the latter does not). Thus, the difference in value and transaction costs between a BOT and a TCC of same maturity, especially in the context of a highly developed financial market (like Italy’s) and given that the issuer is the same, would be nil. Moreover, whereas the BOTs carry a default risk, the TCCs do not. Furthermore, since according to our proposal TCCs maturing every year would be only a small fraction of Italy’s total gross fiscal revenue, the output and revenue effect from the stimulus would prevent any shortage-of-euros problem that could affect the regular servicing of the debt.
  • Fourth, the report states that, *“[TCC] holders would…be forced to trade them prior to maturity in case of financial needs… [which] would shift of wealth from budget-constrained tax-payers towards agents able to speculate on the value of these securities.”*In fact, there is no shift of wealth whatsoever; on the contrary, TCC issuances would be a net addition to the financial wealth of beneficiaries, and since the latter would be selected among those with a high propensity to spend, they would either spend them in a dedicated payment platform (see above) or convert them in euros and spend them as such. In this latter case, there would be a change in the composition of wealth (from TCCs to euros and vice versa), not a transfer of wealth. Moreover, even in the very unlikely event that TCCs would trade at a large discount, they would still constitute a net addition to the financial wealth of their beneficiaries (and the economy’s at large). That is where the additional spending power and the economic stimulus originate from. TCCs are quasi-cash, liquidity constrained agents would spend them, and the protraction of the program until the economy recovers influences positively the agents’ expectations and consumption decisions.
  • Fifth, the report states that*“there would be no competitiveness gain as the wage level would remain unchanged”*. Wrong! This statement ignores altogether another key item of the proposal, which was noted earlier – the allocation of a share of TCCs to firms, specifically for the purpose of reducing their cost of labor. This would directly improve the external competitiveness of national producers.
  • Sixth, one of the report’s most bizarre statements is that, “these proposals would not provide anything – from the purely technical point of view – that euro-cash and standard government bonds cannot already provide”. Of course! This is precisely due to the Eurosystem’s current setup, which prevents governments from issuing money and allocating it through the budget to economies that are mired into depression or stagnation, and it looks extremely dubious that a political consensus will emerge to modify the Eurosystem’s setup appropriately.
  • Lastly, the authors of the report seem to neglect European accounting rules when they state that, “TCCs are tools for increasing the government deficit… from an accounting point of view, this is obvious since these IOUs would be distributed without any counter-payment from their receiver”. There is a major inaccuracy, here: TCCs are not IOUs. They are designed as “non-payable tax credits” which, according to the European System of Accounts, do not go into the fiscal budget until they are actually used for tax rebates (that is, two years after their issuance); thus, unlike the IOUs, TCCs are not a debt instrument and their issuance does not increase the deficit. That they are distributed without any counter-payment does not change the fact that they do not create deficit when they are issued and assigned to selected groups of beneficiaries. And if the program temporarily underperformed, the policy authorities would activate safeguard measures and restore fiscal compliance. This could be achieved by financing select public investment with TCCs (instead of euros), raising taxes and simultaneously allocating additional TCCs, incentivizing TCC holders to reschedule their use for tax rebates by enhancing their value, and placing TCCs in the market (in exchange for euros). These measures would raise the needed euro-cash while avoiding procyclical effects. Importantly, they would prevent market uncertainties, and the low ratio between TCC tax rebates and government gross receipts would make them sustainable.

To conclude. In its latest report on the European economy, CESifo has criticized our fiscal money proposal. It has done so using secondary (and largely inaccurate) sources, omitting important aspects of our proposal, and seriously misrepresenting others. The importance of CEsifo reports should place on their authors the onus of being much more rigorous in analyzing new proposals before issuing final verdicts on them. The lack of such rigor places the reports at risk of credibility. Still worse is CESifo’s failure to accept open debate.

The Group of Fiscal Money

Biagio Bossone, Marco Cattaneo, Massimo Costa, and Stefano Sylos Labini


**[i]**We define Fiscal Money as “any claims, private or public, which the state accepts from holders to discharge their fiscal obligations either in the form of rebates on their full value (tax discounts) or as effective value transfers (payments) to the state. Fiscal money claims are not legal tender, and may not be convertible by the state in legal tender. However, they are negotiable, transferable to third parties, and exchangeable in the market.” See Bossone, B, and M Cattaneo, New ways of crisis settlement: Fiscal Money as a tool to fight economic stagnation, presented to the conference on “A single model of Governance or tailored responses? Historical, economic and legal aspects of European Governance in the Crisis,” FernUniversität in Hagen, Germany 24 – 25 November 2016, and published on the book by the same title edited by P. Schiffauer, Veröffentlichungen des Dimitris-Tsatsos-Instituts für Europäische Verfassungswissenschaften, Band 19, Berliner Wissenschafts-Verlag, pp. 111-133.

**[ii]**The acronym “BOTs” stands for Buoni Ordinari del Tesoro. They are short term bills issued by the Italian treasury.