Florin or Lira: the change would not immediately require the creation of physical coins and notes.
Bank runs? Sharp devaluation of the new currency? Galloping inflation? For all the negative scenarios generally projected when talking about a country's exit from the single currency, Claudio Borghi Aquilini has an answer: they are exaggeratedly pessimistic, there are several ways to control them and they will be easily overcome once the advantages of a economy having its own currency are beginning to become evident.
The plan outlined by this economist for Italy's exit from the euro is not very innovative compared to similar plans presented in other countries. It relies on the speed of the operation to reduce the period of uncertainty, foresees the implementation of measures that minimize the immediate negative effects of a currency change and bets everything on the idea that the potential gains for the economy in the long term will quickly outweigh any possible short-term losses.
Firstly, speed. In the plan, there is no place for any referendum, because during the period of public discussion of the possibility of Italy leaving the euro, the country would be subject to “speculative attacks” to which a government in favor of the euro would not know how to respond. “The only way to make change is through a democratically elected government that acts quickly by decree”, says the plan, which does not clarify how it would be possible to avoid possible speculative attacks that would occur as soon as it began. it became clear that parties in favor of leaving the euro could win the elections.
The main decision that would be taken by the Government was the conversion of the euro currency to a new Italian-only denomination. It could be a return to the lira or another name, with the florin being Claudio Borghi Aquilini's favorite. One euro would be exchanged for one guilder, avoiding the phenomenon of rounding and the demoralizing effect of the high values that were applied to the lira (when the change to the euro was made, one euro was worth 1.936,27 lire).
The change, according to the plan, would not immediately require the creation of physical coins and notes, everything could be done electronically and benefit from the new technology that exists for this purpose.
Of course, in view of this change, and in the face of a scenario of very likely devaluation of the new currency against the euro and other international currencies, anyone who saw their deposits, debt securities and other assets being converted into florins would be tempted to do something thing quickly, if not before the redenomination, immediately after. Examples such as those in Greece and Cyprus recently or Argentina in the last decade show that a run on deposits can very quickly be triggered, accompanied by an attempt to move money out of the country.
In the plan, it is assumed at a certain point that “probably, during the conversion, for a few days, it will be necessary to close the banks to prevent speculation”. However, it is not specified for how many days this exceptional scenario (and very negative for economic activity) would persist.
To compensate, and help the economy immediately, Claudio Borghi Aquilini launches some ideas. The main one is the injection, even before the redenomination, of liquidity into the economy. This would be done by the Treasury and not by the central bank, through the delivery to State suppliers of debt securities corresponding to the 90 billion euros of commercial debt currently existing in the Italian Public Administration. These bonds would be issued with values equivalent to current notes and could be used as a means of payment between people, offsetting any sudden reduction in liquidity in the country.
The immediate viability of the banks, which would be further pressured by the reduction in deposits, would be ensured by the intervention of the State and the central bank.
In relation to the outside, what is assumed in the plan is that Italy would in practice partially default on its obligations. For example, it is assumed that the Italian central bank would make its commitments to other central banks in the euro zone, not in euros, but in the country's new currency, which would be worth much less.
Aquilini, even so, makes a point of ensuring that he does not believe in scenarios of strong devaluation of the new currency and hyperinflation following Italy's exit from the euro. The economist argues that currency devaluation would happen but would be relatively moderate, because Italian products would quickly become more competitive and the country's trade surplus would become even greater. It would be Italy's own trading partners who would be interested in sustaining the value of the new Italian currency, he believes, ensuring that the positive economic effect of a currency more adapted to Italy's needs would solve all problems.
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March 12, 2022 at 07:41 pm
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