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Why So Much Cash Is Used In Italy… And It Is A Good Thing

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May 28, 2010 Travel Expert 6 Comments

Why should you support the use of cash in Italy? Does that not mean that you are facilitating tax evasion? Not necessarily. Instead, overusing your credit card in Italy means to undermine their social fabric, and might hurt the local economy and culture. Here is why.

The cash economy in Italy is far larger than Northern Europe, North American or Australia. This is cultural. This is structural. This is desirable. And this is the optimum way for Italy to be. Now they just need to ensure it continues.

Visitors have issues with the use of cash in Italy (and Greece and Spain). Of course, they assume, it is all to do with tax evasion. They therefore offer their credit card and when told that only cash is accepted, do the huff and puff and mumble about backward society, tax cheats etc and then fumble around for cash making a big issue of how wrong it is.

Euro banknotes 300x174 Why So Much Cash Is Used In Italy... And It Is A Good Thing

Oiling the wheels

The tax evasion argument is benign, but for the cynics, at the end of the article there is a short discussion to show it is no different here than anywhere else.

There are a number of reasons cash is a good thing, but 2 of them stand out – support the culture you have come to see and stay safer.

Supporting the Cash Culture

Due to historic instability and terrible governance (not entirely historical – much contemporary) Italians developed a system of storing their wealth themselves – cash under the mattress thing.

It therefore becomes part of the culture. Show an Italian a confirmation receipt of a bank transfer, and they sniff and begrudge a thanks. Show them an envelope of cash and there is visible satisfaction. Italian culture is not so much about planning, or future. It is about moments. And that is one of them.

Ok. Just because it is part of the culture, doesn’t make it a good thing. No, but the use of cash reinforces the concept of using savings instead of debt to fund your life – something we teach our kids then ignore. A structural example is that the mortgage market in Italy is very small, because people use savings (not just personal, also from family). So although Italy didn’t boom as much as other nations through last decade, that are in a much better state to weather the storm as they would have been through debt driven growth.

Supporting the cash culture therefore means that you support the “savings” as opposed to the “debt” culture in Italy.

Stay Safer

Most people assume that if their credit card is lost or stolen, no biggy, just report it and get a replacement. Well, just try that here in Italy for a foreign card. It can take many days of waiting plus days of reporting.

Secondly, you are safe with handing over cash. When I hand over 50 euro in a restaurant, that is the limit of my exposure. The restaurant doesn’t have my credit card details there to use or to sell the details with my signature and the security code (I am not suggesting they do. But use your credit card for 2 meals a day, for a 3 month trip around Europe, and 180 different restaurants have your full credit card details – balance that with the hesitation you might have to hand details over to one person). I would rather risk losing a little bit of cash than being stuck without a credit card (lost) or having to check my credit card statements in detail for the next 5 years.

Carrying cash is not that risky. Don’t use a wallet. Put a few notes in different pockets and no pickpocket could get more than a few notes.

The Cash Culture In Context

My personal reason for wanting things to remain is largely based on maintaining Italian culture. To “co-ordinate” any system and make things more efficient, you need to replace the guts of that system. In the end, what happens worldwide, is that tourist popular cities just become facades and the total mechanics of the local culture is destroyed in order to make it “efficient” for foreigners. Their payment requests, their air-conditioning demands, their “service” just like home expectations, even wanting the plumbing to work all the time. So just the walls and the streets remaining as “historic”. And behind it runs at the efficiency of a McDonalds. That could be replicated in Las Vegas.

And that is the problem. Currently it is very difficult for the chain stores to come it. The local way of doing things makes the “just in time” delivery and processes quite impossible. Make the infrastructure work better, and the whole city can be turned into an efficient, finely oil machine for – perfect breeding ground for the process driven businesses. And the local artisans and bakeries and restaurants and butchers will all get squeezed out.

But What About Tax Evasion?

All societies have methods to “work the system”. The politicians in UK in 2009 were exposed to cheating on their taxes, (mis declaring second homes etc), and their expenses. Banks shunt money from one section to another, often in another country, to evade inspections either for tax or audits. Basically, hiding money in different ways. Same in Italy, just different mechanics.

The current discussion in the UK is that bankers, earning 500,000 GBP, should pay 50% tax. They are horrified by that and threatening to leave on mass. Well, your average bus driver or teacher in Rome pays something similar.

“Working the system” is never great. But the tax burden on Italians is far higher than US, UK, Australia etc. The “tax wedge” (difference between what you earn total and what you take home from that) is a much heavier burden in Italy. In Australia, you loose 26% (i.e, for every 100 AUD earned, you get 100-26=74 AUD in your pocket). In the US, you loose 29%, and in the UK 32%. In Italy, you loose 47%! Almost half.

Current and historic tax wedge figures have been provided by the OECD.

Supply of Money

The credit crisis should help people understand another benefit of a “cash mentality”. Money should be created by governments (or government agencies), not private institutions or individuals (counterfeiting we know is illegal). They then monitor the amount of money in the system (by calculating total volume by speed of movement) and match it to the amount of trade (value of goods, services, etc). They need to make sure there is not too much so you have more money chasing the same number of goods causing inflation, or not enough causing deflation.

Well, that is the theory. As we all know by the credit crisis, governments have no idea of what is going on. The theoretical controls on banks supplying money (debt) to the system basically meant they were printing money under the governments noses. Finally that came to a grinding halt (and govt. took taxpayers money to give to the banks).

Cash is only supplied by the government (except a small amount of counterfeiting) and therefore controllable. So the more, as a percentage of the total, the better. But electronic payment (on internet, for domestic bills, larger payments etc) is always useful, as an addition to facilitate as required.

Conclusion

On balance, enforcing your credit card isn’t big, isn’t clever, and in fact is one of the main problems in trying to keep the authenticity of Rome, and the Italian culture.

The cash economy is good thing. Learn to love it because it is beneficial to society, the business, and most of all, you.

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Currently there are "6 comments" on this Article:

  1. Eli says:

    Well-loved. Like or Dislike: Thumb up 4 Thumb down 0

    Eye-opening! I have always been very annoyed by difficulties to pay by credit card but didn’t realise these implications.

    Now, finally, I will not run around torturing everyone with my credit card anymore. Maybe I’ll start hiding some cash as well.

  2. Sam says:

    Like or Dislike: Thumb up 1 Thumb down 0

    It is cultural, but to make credit cards better than cash, the infrastructure needs to be there. In the UK, using a credit card is far more convenient, quick and secure than using cash – to the extent that using cash can be a pain (getting it out, not having enough on you to pay for something, getting loads of pointless coins for change to carry around).

    Personally, I say credit cards are way better than cash – but only if implemented properly. I can’t see this happening Italy for at least 10 years!

  3. Like or Dislike: Thumb up 3 Thumb down 0

    Good airing of the situation here in Italy.

    Of course one of the reasons for the much higher tax burden is that (culturally) no one expects you to actually declare anywhere near your real earnings and transactions, so the percentage is higher to compensate. Clearly there are winners and losers to that approach.

  4. Like or Dislike: Thumb up 1 Thumb down 0

    [...] Why So Much Cash Is Used In Italy… And It Is A Good Thing [...]

  5. Like or Dislike: Thumb up 1 Thumb down 0

    [...] Why So Much Cash Is Used In Italy… And It Is A Good Thing [...]

  6. Alex S says:

    Like or Dislike: Thumb up 0 Thumb down 0

    The writer of this article somehow assumes that you can get in debt only by using a credit card, which is wrong. The cash can be borrowed from a bank as well, and a card can be a debit card so this makes no sense. It’s obviously that they do that so they can cheat their taxes, especially since they give you only handout receipts or no receipts at all.

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