Some politicians in Italy are enthusiastic about an idea called the “mini-BOT.” That’s short for “mini–bill of treasury,” and the idea is for the Italian central bank to issue small-denomination government bonds. Members of the public could then use the bond certificates to conduct transactions and pay taxes.
If it sounds like I’ve just described money, that’s because a mini-BOT would be a lot like money. But it’s illegal for participants in the euro to issue their own currencies. So officially, the mini-BOT — which is in the study phase and won’t be issued anytime soon, if at all — wouldn’t be a currency; it would just be a government bond, pegged to the euro and redeemable for euros.
But there is a wink-and-nudge element to that “not a currency” disclaimer. Some of the mini-BOT’s advocates, including Claudio Borghi, a lawmaker in Italy’s ruling Lega party, hope to use it as a temporary currency as part of an exit from the euro. As Jason Horowitz reports for the New York Times:
In a book discussing the mini-BOT, Mr. Borghi wrote that once the mini-BOTs were widely distributed in Italy, they would become a “spare tire that will make the possible changeover to our currency much easier.” If Italy ever decided to leave the euro, as he hoped, it wouldn’t have to wait to print bank notes “because everything has already been done: on the day of the changeover, it will be sufficient to declare the mini-Bots new currency,” he wrote.
The Times says some mini-BOT advocates believe having the small bonds around would help avoid bank runs if Italy were ever poised to leave the euro. Luigi Zingales, an economist at the University of Chicago Booth School of Business, says that’s wrong.
“It’s not going to stop the bank run,” says Zingales. In fact, the choice to issue mini-BOTs could encourage a bank run because it would signal that Italy might intend to exit the euro. If Italy were going to leave the euro and issue a new currency, the government would presumably intend to significantly devalue the new currency to reduce the burden of government debt. So depositors would want to get their money out of Italian banks and into forms that wouldn’t face devaluation, such as physical euro notes or foreign deposits.
That said, mini-BOTs would help with another major problem that would arise if Italy ever tried to leave the euro.
“One of the major concerns of getting out of the euro is the country will find itself without currency for a while, without cash,” says Zingales. “Everybody will treasure their euros and will like to trade in something else. So if you have the mini-BOTs, they will be in lira, and people can trade with that. And because in Italy there is still a huge amount of the economy that is a cash economy, that’s important.”
This illustrates why leaving the euro has been a nonstarter even for Greece, a country that has more reason to regret its participation in the euro than Italy.
Exiting a shared currency is a complicated and messy process that can benefit from extensive logistical planning. For example, it’s good to have a lot of replacement banknotes ready to go as soon as you switch to the new currency. But if people expect that you will exit a shared currency, there will be a bank run, so you also want the currency switch to be a total surprise. Unfortunately, while it’s possible to achieve either extensive collaborative advance planning or a surprise announcement, it is very difficult to achieve both.
For this reason, Zingales does not believe the mini-BOT is part of a viable strategy for an Italian exit from the euro, nor does he believe the government’s intent in studying the mini-BOT is to plan for an actual exit, which both the government and a majority of Italians say they oppose. He believes Italy’s populist leaders instead intend to use the mini-BOT as a threat during negotiations over Italy’s continued violation of EU fiscal guidelines. By signaling a possible willingness to quit the euro and create a big mess for both Italy and the rest of Europe, they may hope to secure fiscal concessions from Germany and other Northern European countries.
But Zingales, who is originally from Italy and completed his undergraduate education there, does not believe that will work either.
“My understanding of Germans is they’re ready to cut their dick to spite their face,” he says. “They are prepared to pay any consequence to not be blackmailed by Italians.”
Zingales argues that while Italy has a problem with fiscal sustainability, its biggest problem is economic stagnation. The Italian economy is no larger than it was 25 years ago, and the country bleeds high-skilled workers who can make more money elsewhere. He advocates a compromise wherein the EU continues to give Italy latitude to violate its fiscal targets while Italy agrees to shift more of its spending away from current costs and toward capital investments that could grow its economic output and fiscal capacity and make it more attractive to workers and businesses in the future.
That approach has eluded Italian governments across the ideological spectrum, even as they have intermittently expressed the need to focus on competitiveness and growth. But it would be more practical than trying to use mini-BOTs as a bridge out of the euro.