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Sunday, December 5, 2021

Print money, a myth to dispel or the solution to public debt?

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What does it mean to print money? But above all, what does it mean to be part of the euro? The two concepts are always connected in those who regret the lira and argue that it was better when Italy could go into debt without limits, not like now that it must respect the Maastricht constraints (deficit below 3% and public debt below 60%). Is the leader of the League Matteo Salvini right who hoped that money would be printed? What would happen?
Currently, due to the huge economic crisis triggered by the spread of the coronavirus, Brussels has suspended the Stability and Growth Pact, so the Eurozone countries can get into debt without restrictions. But just like that? Is the euro just a ballast? A first fact to remember that in Italy the divorce between the Ministry of the Treasury and the Bank of Italy dates back to 1981: since then, Bankitalia can no longer finance the Italian debt by printing money. So long before the euro entered (January 1, 1999 on the financial markets, January 1, 2002 banknotes in the hands of citizens).

Debt and the ECB

As things stand, Italy can now go into debt indefinitely because the Stability Pact has been suspended. The problem that must do on the financial markets. To borrow money, you will have to pay interest which corresponds to the trust that investors have in paying off. This confidence indicated (simplifying) by the spread: the higher this number, the greater the distrust of investors and the cost of interest for the country. After all, Italy already has a debt that about 130% of its GDP, the highest in the Eurozone after the Greek one. If Italy were to print money on its own, it would not go and get the money on the market. It cannot do this because the European Central Bank which decides monetary policy and by statute an institution independent of the Member States and also of the governing bodies of the European Union. Its primary objective is price stability (to keep inflation below but close to 2%). In the Eurozone, the monetary financing of deficits is prohibited, so the ECB cannot buy securities on the primary market. However, both during the sovereign debt crisis and now the ECB has implemented Quantitative easing, an unconventional monetary policy instrument, which provides for massive purchases of public securities on the secondary market.

Print money and inflation

If instead a government has control over the central bank, or a strong influence on it, it can decide to cover its needs by selling its securities to the central bank and requiring it to print money to finance its purchase, in this way it will not have to pay interests. But if it is so simple, why doesn't a state do it? Why don't Great Britain, Switzerland or the United States who have their own currency do so? The problem is that having a monetary policy subordinated to the needs of public finances is dangerous. Debt monetization threatens to undermine the value of the currency itself, therefore it risks producing an increase in inflation. what happened in Italy: between 1973 and 1984, inflation never fell below 10%, well above the average of industrialized countries. It means that the purchasing power of families, workers, pensioners but also of companies that had to buy raw materials abroad was severely compromised.
High inflation affects all citizens and especially the weaker sections, in fact a tax. The effects of debt monetization are not seen immediately, in the short term it may seem the quickest solution to solve a country's problems but in the long run counterproductive because it increases inflation and makes public finances fragile. All the more so for a country that already has a very high debt.

Italexit

While short-term debt monetization can theoretically be beneficial, it certainly won't in the long run. But those who propose it now associate it with the farewell to the euro. Those who say that it is better to leave this Europe, without explaining what Italexit means and what it means for a country like ours, to leave the European Union and play the game of globalization by itself, are starting to pick up voice. Many do not seem to remember how weak the lira was against other currencies. Being part of the Union means having facilitated access to a potential market of 500 million people, the euro a strong currency, abandoning it would mean seeing your purchasing power halved if not more in this context. The weaker sections of the population would be the most affected. And the room for maneuver that the state would have would not give the promised benefits. Now it is a question of using this crisis to improve the European Union and make it take a qualitative leap. what Italy, France, Spain and Portugal are trying to do together with other countries, opposing the vision of Germany, Holland and the Northern countries, seeking shared financing solutions (eurobonds) to face the coronavirus emergency, with the awareness that this is a crisis that affects all countries.

. (TagsToTranslate) money (t) country (t) monetization (t) Italy

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