With a booming black economy and the highest number of small businesses in Europe, cash is still very much king in Italy and Giorgia Meloni’s new right-wing coalition wants to keep it that way.
While the rest of Europe hurtles towards a cashless society, cash-dependent Italy is stubbornly resisting.
Meloni's newly installed government has put forward proposals to help the country’s backbone of small businesses by prolonging the lifespan of cash. In the process, she is locking horns with the EU and her own central bank, who complain high cash usage is fuelling the black economy and enabling tax dodging.
One of the centrepiece policies in Meloni's new draft budget is a plan to help small businesses avoid card transaction fees. If they were forced to pass on these fees to their customers in the form of higher prices, “no one would pay for a coffee with their card”, Meloni complains.
In a bid to help small merchants, Prime Minister Meloni has also set out plans to increase the legal limit for cash transactions from €1,000 to €5,000 while also scrapping fines for retailers who refuse cashless payments for transactions under €60.
Meloni has criticised the transaction costs for small businesses as a “hidden tax” on the economy that boosts banks while helping them spy on citizens.
Brussels and the Bank of Italy take a very different view. Meloni’s measures threaten to trigger a showdown with the EU over €200bn of recovery funds, while setting back Italy’s war against tax evasion. In the process, the new Italian prime minister is setting up a culture war clash that pits the old economy against the new.
Alessandro Santoro, a tax expert at the University of Milano-Bicocca, says: “It is true that there are some costs associated with the use of electronic payments for businesses, but actually they have been recently lowered.
“As the Bank of Italy stressed, there are also costs for cash. Just think about the safety costs and the risks you run by keeping a lot of cash in your shop.”
Italy is already one of Europe’s biggest users of cash. The average Italian made just 114 transactions on card last year compared to the EU average of 172 and almost 400 in top ranking Denmark.
Even after the pandemic, cash made up three-quarters of transactions in Italy compared to just 15pc in the UK.
Santoro says: “In recent years, because of the pandemic, we did have a great increase in the use of electronic transactions. This is to some extent [a risk] to stop this and to prevent Italy catching up with other European countries that are more used to electronic payments.”
He says the Italian economy’s reliance on small businesses and its swathes of small villages make the country more suited to cash.
“We have an economy, which is characterised by very small businesses,” says Santoro. “For these kinds of businesses, the use of cash is probably more natural... We have a lot of very small villages where banks are not so present.”
In addition, Italy’s economy is still affected by its organised crime and a culture of tax evasion. Italy has one of the largest black economies in Europe, sucking revenue from its cash-strapped coffers.
Cash is most prevalent in the poorer south of Italy in regions such as Sicily and Campania, a reliance that experts say is linked to a bigger black economy and less modernisation than the wealthier north.
“More cash is connected with more tax evasion in some countries like Italy,” says Valeria Portale, head of the innovative payments observatory at the Politecnico di Milano School of Management.
“Tax evasion is not only connected to consumption like through VAT but it's also connected to black labour, like if I pay my employee with only cash.”
Meloni’s plans potentially set up a clash with the EU. It is providing Italy with the most pandemic recovery money under a plan agreed by Meloni’s technocratic predecessor Mario Draghi, who introduced fines for retailers who refused card payments.
In return for €200bn of funding, Italy has to enact a number of reforms, including some aimed at digitising the economy and stamping out tax evasion. One of the EU reform targets was to introduce fines on retailers that refuse card payments.
Experts have warned that the proposals threaten to break the EU goals. Meloni has conceded that she may water down her own proposals if faced with pressure from Brussels.
“There are obviously discussions on this with the European Commission, because the issue of electronic payments is one of the issues of the [EU recovery plan], so we have to see,” she said.
Meloni is also facing pushback from officials in Rome. The aversion to going cashless costs the heavily indebted Italian government more than €100bn every year in the form of tax dodged.
Fabrizio Balassone, an economist at the Italian central bank, told parliament this week that limiting cash use and encouraging card payments would “pose a hurdle to several forms of crime and [tax] evasion.”
In an unusually frank criticism, Balassone noted that Meloni’s plans threatened to clash with the EU-backed “drive to modernise the country”.
A permanent move away from cash would help Italy close its massive tax gap - the difference between what is owed and actually brought in by the taxman. Nearby Greece is already using a suite of measures to digitise business and help stamp out massive tax evasion.
Brussels estimates that Italy lost more than €30bn in the VAT receipts alone in 2019, the highest sum in Europe, because of a prevalence of cash. Italy had one of the highest VAT gaps in the region, with 21.3pc of total VAT owed dodged. That is well above the UK’s level of 8.9pc.
The Bank of Italy estimates that every percentage point increase in the share of cashless payments boosts VAT revenue by 0.4pc.
The shift to cashless payments during Covid bore this out: revenues from many taxes typically fall in a recession but Italy’s central bank found that a decline in VAT revenue during the pandemic did not track the slump in household consumption.
As the rest of the world races towards a cashless society, experts are bemused at Meloni’s plan to hold back Italy.
Santoro says Meloni is halting Italy’s cashless shift for “purely political reasons” and was chosen as a “symbol” for a thin budget.
“They have this constituency of small businesses, which probably voted for them,” he says.
“What we are lacking here is a vision. What is the aim?”