FCN: Parallel currency talk gains ground in Italy … FT ALPHAVILLE 22, 2017 at 10:33AM

Talk of a domestic parallel currency being introduced in Italy is not new.

But it has been reinvigorated this week because of an interview with Silvio Berlusconi (a longstanding proponent of the idea) in Italian publication Libero Quotidiano,where he argues the introduction of a national parallel currency will help Italy regain monetary sovereignty in a way that later supports domestic demand.

Citi’s analysts summarise it as follows:

Berlusconi is convinced such a parallel currency would be consistent with European Treaties, although it would require significant negotiating skills to agree it with Germany and France. Berlusconi said the right-wing Lega Nord’s proposal of introducing the so-called ‘mini-BoT’ (short-term, interest-free, small-sized government securities, a sort of ‘IOUs’ to be used as internal currency to pay government suppliers, taxes, social security contributions, etc) would not be too far from his idea of a parallel currency.

The Lega Nord has been arguing that mini-BoT would be the first necessary step to smooth the transition out of the euro. Libero argues a deal on the euro/European relations between Forza Italia and Lega Nord (together close to ~30% of the votes) would help finalise a common political programme for a centre-right alliance, with anti-immigration, a Flat Tax on income and scrapping pension reforms already being agreed. Berlusconi said the three centre-right/right-wing parties (including the small FdI, ~5%) will finalise a joint programme in early September. Corriere reports that the three parties remain however divided on the electoral law and on whether to include the centrists into the alliance.

Berlusconi’s point then is that a parallel currency could be launched entirely legallywithin the constructs of European treaties, with the ECB potentially powerless to intervene once the decision has been taken.

Either way, regardless of whether Italy goes down the path of an explicit parallel currency or the introduction of small-sized Italian government securities, it’s clear the will to break up the euro’s monopoly in Italy is growing.

According to Citi’s analysts more than two thirds of Italian voters currently support parties with an anti-euro stance.

That makes Italy a much greater source of potential European Union instability than most people appreciate. Not least because if Italy can go parallel, so can other countries.

What this means for the wider ECB system, of course, isn’t certain. There’s no guarantee an Italy currency offshoot will be successful just because the government initiates it. As with all successful currency phenomena, it’s ultimately the users who will determine its success.

If Italian businesses, individuals and debtors continue to cling onto their euros after the split, the parallel currency project will be a dud. If, however, in the spirit of economic nationalism (not dissimilar to the cultish decentralised nationalism of bitcoin) Italians back the parallel unit for cultural and emotive reasons, it’s hard to see how the euro could ever compete.

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.

But, as powerful as they are, international banks don’t (yet) have the right to use violence, coercion or force against indebted states. What’s more, if economic nationalism breeds a desire for domestic autarky, they may be disempowered further still.

That said, autarky comes with its own costs (see Venezuela). It also — more often than not — gives way to interdependence with allied states in the long run anyway (see North Korean trade with China).