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Ending Austerity without Leaving the Euro: How Complementary Fiscal Currencies Could Help

Gaël Giraud & Jérôme Blanc & Benjamin Lemoine & Marie Fare & Jean-Michel Servet & Bruno Théret & Thomas Coutrot & Vincent Gayon & Wojtek Kalinowski , 9 May 2017

[English] [français]

Introducing liquidity into a crisis-ridden economy through a complementary currency, backed up by future tax revenue: such a step would make it possible to imagine alternative policies without necessarily calling the common currency into question. It would also bring stability to the Eurozone.

Through the extension of credit, private commercial banks have a near monopoly over monetary creation. In the wake of the European Central Bank’s massive low-cost liquidity injections into the private banking system, it has become clear that this monopoly has locked the European economy into a deflationary trap. In recessionary periods, commercial banks are structurally incapable of ensuring the countercyclical creation of credit currency aimed at productive sectors. To increase their profits, they rather direct most of their liquidity towards financial markets, thus feeding dangerous speculative bubbles.

Consequently, many economists and some politicians agree on the need to rescind banks’ money-creating privileges. Switzerland will vote on this issue in 2018. Even so, such a reform implies an agreement among EU member states, which, at present, seems unlikely to happen. But what are the alternatives? Leaving the euro? Economists as well as political parties adopt radically different positions on this issue, from defending the status quo of the euro as a single currency to the return to national currencies. In this context, the recent proposals of the French far-right candidate for president, Marine Le Pen, must be discarded because of (among other things) the vagueness and contradictions of her proposal: her late call for a “common currency” was based on the ignorance of what the ECU and the European monetary system had been before adopting the euro.

More seriously, Syriza’s rise to power in Greece in 2015 led to proposals for a different approach, which could have allowed that country to abandon austerity policies without threatening the Eurozone’s unity: injecting liquidity into the economy by issuing a fiscal currency that would complement the euro, rather than replacing it. With this strategy, the euro would remain the legal tender in all member states, but would be supplemented by a mechanism for making payments at the national level, consisting of treasury bonds in low denominations—five to fifty euros—and valid for limited but renewable periods. Backed up—like any public debt—by future tax revenue, these bonds would be denominated in euro-francs and kept at parity with the euro, without necessarily being convertible on currency exchange markets.

Thus the point is not to issue a currency serving as legal tender, but to issue bills of credit that would pay for civil servants’ salaries, social services, and public procurement—expenses that, in practice, amount to short-term public debt. They would be reciprocally acceptable as tax payments and, thanks to this guarantee, could circulate as means of payment at the national level.

Given current austerity policies, this type of currency should be issued wherever the common currency leads to recession, mass unemployment, rising social insecurity, and the suspension of long-term investment that is essential to the ecological transition. But the common currency/complementary fiscal currency duo is not only a pressing solution, it is also potentially a lasting tool for achieving monetary stability in the Eurozone. Indeed, the reduction of public debt through the self-financing of floating debt and the improvement of foreign exchange balances through import reduction (as the geographically limited circulation of the euro-franc would be an incentive to relocate production) would progressively reduce states’ external dependence on international finance as well as on foreign markets, which are the primary reason for instability in many countries.

This form of liquidity, issued by states without the mediation of banks, is actually not new. Experiments in combining it with a common currency in a federal-type political system were repeatedly made in the United States in the 1930s and, more recently, in Argentina between 1984 and 2003. These experiments show that, under certain conditions, monetary systems of this kind fulfill their mission of reducing public debt and re-stimulating local economies without creating inflationary tensions or a disconnect between local currencies and the central currency.

Given the current state of European treaties, the strategy we propose is consistent with the principle of subsidiarity, which grants each EU member the ability to take its own initiatives in fiscal and budgetary policy. States would by no means be required to succumb to markets and commercial banks in order to finance themselves, particularly in the short term. Nothing would prevent them from having their own payment systems, providing the latter satisfy requisite conditions.

Creating national fiscal currencies to complement the bank-euro would make it possible to finance public services and to end current austerity policies that threaten the European project itself. This is a realistic policy that could be approved immediately and unilaterally at the national level, and this without violating European treaties.

But to ensure the success of the euro-franc (or euro-pesata or euro-drachma), it is not enough for states to guarantee its acceptability by instituting it as a means for paying taxes and by establishing its parity with the euro. The policy must also be supported by a large portion of the population and recognized as a plausible tool for ending austerity. To do so, a fraction of the fiscal currency created could be distributed to small and medium-sized businesses and indebted households as a means of settling their (private) debts. This measure would achieve four goals simultaneously: through a partial debt jubilee, it would bring an end to excessive private debt, which is the primary cause of the recession from which our economy suffers; far from penalizing creditors, it would provide them with security, in a context marked by highly uncertain solvability; it would bring about “quantitative easing for the people,” which Mario Draghi acknowledges would re-stimulate Europe’s economy and employment; and it would put into circulation a complementary currency at a level at which none of the local currencies that have recently been invented can aspire to.

Of course, other means of ensuring that that this currency is considered trustworthy are perfectly conceivable. We wager that the euro-franc would soon be imitated by our neighbors, which, by the same token, would bring new legitimacy to a euro that was henceforth our shared currency.

Slightly modified version of an op-ed published in the French daily Libération, March 9, 2017. Translated from French by Michael C. Behrent.

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