Italy has a vibrant new prime minister, Matteo Renzi, whose last name needs to be Frenzy. In less than a year he’s made big changes to governance, considerably liberalized labor laws, reduced short-term taxes on brand-new hires, promised to cut in half the size of Parliament, and revived wish for his economically beleaguered nation.
However Renzi needs aid. He knows that Italy needs to invest, especially in education, broadband innovation and clean energy. Yet with unemployment at 13 percent, he dare not raise taxes. As for borrowing to invest, even when the investment will pay for itself, that’s a no no thanks to German Chancellor Angela Merkel’s enforcement of the European Union’s Stability and Development Pact.
If only Italy might magically eliminate its exceptional financial obligation, which surpasses 130 percent of GDP. Then Renzi would have the headroom to move Italy forward.
The Easy Way to Getting rid of Debt
Really, there is a fast and painless method for Italy to end up being debt free. Italy can just buyredeem all exceptional government financial obligation and spend for these bonds with commitments to bigger future pension payments. Thus an Italian holding, say, EUR100,000 in government bonds, might swap them for, say, EUR101,000 in future pension commitments as valued in the present. The 1 percent grease, here, would offer Italians an incentive to purchase up all outstanding Italian government bonds and exchange them all for higher pensions.
Sound insane? It’s not.
Chile performed such a greased swap in 1980, but in reverse. It took back pension pledges from workers in exchange for government bonds plus a kicker. More just recently, Argentina, Bolivia, and Hungary have powerfully confiscated private pension possessions (largely government bonds), switching them for bigger future pension dedications. And Poland, Estonia, Latvia, Lithuania, Romania and Russia are forcing employees to spend more of their brand-new saving on pension claims instead of on possessions, manythe majority of which would be government bonds.
Once he’s reclaimed all Italian government bonds, Renzi might stack them on top of 4,765-meter-high Monte Bianco and put them to the torch. This would let Germans, at least those in Bavaria, see with their own eyes that Italy was debt free.
If this proposal is making you queasy, it should. Swapping one liability for another of equal value doesn’t alter a country’s total liabilities or total financial position. Certainly, if the grease utilized to effect the swap is costly, the nation ends up in even worse fiscal shape. But switching main debt for a liability with a different name does decrease outstanding main debt. And it is the size of official financial obligation, not a nation’s true financial position, that matters to the Stability and Development Pact.