Wednesday, June 26, 2019
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Whose gold is the Bank of Italy

The Bank of Italy has the fourth largest gold reserve in the world, behind only the United States, Germany and the International Monetary Fund. There are almost 2,500 tons of gold, for a value – at current market prices – of 90 billion euros. The history of this accumulation dates back to the post-war economic boom, when a series of prudent Bank governors chose to invest foreign currency earnings of Italian exports in gold bars. The reserve should have functioned as a sort of emergency parachute, should the country's economic situation turn out for the worse. The last purchase of gold was made in 1973, when the reserve hit a record of 2,600 tons.

Since then we no longer talk about buying gold, on the contrary: more and more often we started talking about selling it or finding other ways to put it to good use. Romano Prodi, for example, proposed in 2011 to sell it to a fund where the gold reserves of all European central banks should have been merged, and which would then be used to guarantee the issuance of a new European public debt. Recently, the current majority has repeatedly hinted that these reserves can be used to finance public spending in some way: for example, by defusing the famous safeguard clauses that could trigger in 2020 and increase VAT by over 40 billion of Euro.

What is less clear, however, is who owns the gold of the Bank of Italy and above all who can dispose of it to do what he believes best. The last to deal with this issue were Alberto Bagnai and Claudio Borghi, the two most well-known supporters of the exit of Italy from the euro and today parliamentarians of the League and presidents of the Budget committees of the Senate and Chamber respectively. Through interviews and parliamentary motions (the last one approved a few days ago) Bagnai and Borghi asked the government to make it clear once and for all that gold belongs to the Italian state, which can then dispose of it as it sees fit.

In reality, even before their requests for clarification, there was little doubt that gold was state-owned: the Bank of Italy is a public-law institution, whose president is appointed by the president of the Republic on government proposal. In short, it is undoubtedly part of the perimeter of the State. To repeat it, even through a law, would not change much, at least in the immediate future. However, many fear that Borghi and Bagnai, supported by the Interior Minister Matteo Salvini, intend to reaffirm the public ownership of the gold reserves as a first step to make those same reserves available to the government.

Salvini, Bagnai and Borghi have denied that this is their intention and in fact this maneuver would probably be very complicated to put into practice. The Bank of Italy is, by statute, completely independent of the government, which therefore cannot oblige it to transfer its reserves. Furthermore, the European treaties, which have a constitutional status, prohibit the central banks of the countries of the Union from directly financing the member states (and the Bank of Italy specifies on its website that selling the gold should be considered exactly like a loan).

The fact-checking site Political Report Card wrote in his analysis of the story for AGI:

In the current regulatory framework, a direct executive action seems difficult to force the Bank of Italy to sell its gold reserves and make the proceeds available to the government. This would be true even if the bill was unambiguously clarified that the gold reserves are state property.

But if this or a future government were to be able to take control of gold, would it really be possible to use it to finance expenses such as citizenship income or to block tax increases such as safeguard clauses? The answer is that yes, they could do it, at least for a few years, but it probably wouldn't be a good move and for a number of good reasons.

Salvatore Rossi, long an important leader of the Bank of Italy, in his book Gold, published by Mulino, recalled for example that in 2016 the total supply of gold on the world market was just under 6 thousand tons. If this total were added the 2,500 tons of Italian reserves, or even just a few hundred, the most probable result would be a collapse in the price of gold and a consequent reduction in the profits that the state could derive from the sale.

To this we must add that the liquidation of this heritage – "the family silverware", as Rossi often calls it – would signal a government on the threshold of desperation, willing to do anything to gather a bit of resources. Fearing an imminent collapse, therefore, the funds and investors who today lend money to Italy today would probably demand higher returns, or could even refuse to lend us money, potentially neutralizing any benefit derived from gold sales.

It would be much more prudent to sell the reserves little by little, at the rate of a few billion a year. The benefit of the sale, however, would be very small at that point. Political Report Card noted that if the gold reserves of the Bank of Italy appear impressive at first sight, 90 billion euros, actually amount to just 4 percent of the approximately 2,350 billion euros of public debt accumulated by our country.

In short, selling the gold of the Bank of Italy risks not having great positive effects for the public accounts, but it could have negative effects, particularly in the long term. In his book Rossi explains that an important gold reserve like the Italian one works as an insurance to be used in moments of serious difficulty. Between 1973 and 1974, for example, Italy suddenly found itself short of foreign currency, necessary to buy oil and other energy raw materials on which it depended on international markets. The German central bank agreed to lend it 2 billion dollars, avoiding a serious energy crisis, but asked that as a guarantee of the loan one fifth of the Italian gold reserves. Without the reserves, obtaining the loan would have been more complicated and the Italians would probably have gone cold all winter.

With the single currency such situations have become impossible, and will remain so until this system remains in place. What will happen in the next ten, twenty, thirty or fifty years, however, remains unpredictable. Whatever the future of the single currency and of our country, it will be more risky to face it without the large gold reserves accumulated over the last 70 years.


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