by
Robert Cauneau – MMT France
Ivan Invernizzi – Rete MMT Italia / MMT France
21 September 2020
The authors thank Andrea Valentini – MMT France – for his very useful comments in writing this article.
Abstract
This article presents the MMT vision of the Eurozone (EZ).
It first recalls the logic underlying MMT. The state has a monopoly on the power to tax and choose the means of payment for its taxes. The national currency is created by public spending, then destroyed when taxes are collected. Taxation in this currency makes it necessary for private sector agents to obtain it by selling goods and services, as well as their labor. Everything sold to obtain the currency is simply an expression of the demand for the currency. Unemployment therefore arises when taxation creates a labor supply that the level of public spending fails to satisfy and bring to full employment. It is an unsatisfied demand for the national currency, that is, a purely monetary phenomenon.
The functioning of the EZ is then described, emphasizing that the discourse concerning the State monopolising its currency can only be made at the level of the EZ considered as a whole, not at that of the Member States. Indeed, although the latter themselves create the euros by spending, the absence of a European treasury denies them access to control of both spending and taxation at the level of the EZ taken as a whole. Moreover, the Member States operate within a framework containing financial limits, in reality self-imposed, which are the public deficit/GDP and debt/GDP ratios. These limits represent constraints on the fiscal policy of the States, preventing them from achieving the deficit necessary to achieve full employment. However, they are not based on any theoretical foundation. They are essentially political. Another important consequence of the fact that Member States do not have a monopoly on their currency is the need to raise tax revenues and issue government securities, which, due to the lack of support from the ECB, makes them dependent on financial markets.
The article then discusses the issue of public debt, first presenting MMT’s definition of it, namely the sum of the government’s liabilities. An examination of the accounting of monetary transactions shows that the sale of government bonds is nothing more than a change in the form of the currency, which changes from « reserve » to « government securities, » with its repayment generating a change in the opposite direction, and these transactions have no impact on the quantity of currency in circulation. It is then clarified that, regarding the EZ as a whole, the aggregate public debt of the Member States represents the net financial wealth of the private sector. Adding to this the fact that austerity can also be implemented in countries with low public debt ratios, it follows that talk of public debt as a « burden » or a « cancer, » or of a « wall of debt, » is completely unfounded. And, beyond the fact that the debt ceiling-to-GDP ratio in effect in the Eurozone has no theoretical basis (debt is a stock and GDP is a flow), calls for the cancellation of this debt, whether held by the private sector or by the ECB, only fuel this public debt phobia, the utter lack of foundation of which MMT demonstrates.
Finally, various options for the future of the Eurozone are presented, ranging from exiting the Eurozone to proposals for the creation of a European treasury, as well as the at least partial, but significant, liberation of member states from their current financial constraints so that they can spend more and thus work more effectively towards full employment.
MMT and the Eurozone
The purpose of this article is to present the MMT vision of the Eurozone. It demonstrates that MMT has the capacity to both describe and apply it. It allows us to (1) present the main fundamentals of MMT, (2) describe the Eurozone’s monetary operations, (3) address the issue of public debt, and (4) outline the various options and measures to be taken regarding the future of the Eurozone. I would like to thank you for your very helpful comments in writing this article.
1. The Fundamentals of MMT
To help the reader understand the following developments, it is important to recall some of the elements underlying this theory.1
Modern monetary theory (MMT) is a monetary theory that presents both descriptive and normative aspects, providing economic policy instruments, particularly for achieving full employment while maximizing price stability.
It is based on the idea that the state has a monopoly on the power that allows it to tax and choose the means of paying its taxes. It therefore has the ability to create within its territory the demand for the currency over which it holds a monopoly. Taxation in this currency makes it necessary for private sector agents to obtain it by selling goods and services.
MMT recognizes that all the currency that reaches and uses the private sector comes from government spending, which is the only source of domestic currency with which it can pay taxes or convert it into a specific form of currency called government securities. This contrasts directly with the dominant economic approach, according to which the government must tax to obtain domestic currency to spend. Indeed, all the currency collected by a monopoly state’s taxation of its currency has necessarily previously been channeled into the private sector. The force that keeps the system going is that taxpayers need the government’s currency to be able to pay taxes.
According to this logic, the state cannot default on its own currency, and its spending capacity is therefore unlimited in nominal terms, but limited by the availability of real resources (technological resources, natural resources, and labor). This means that money can activate the economy to its full potential, which is expressed as the economy’s limit until it is reached.
When we recognize taxation as the instrument that, within a territory, imposes on the private sector the need to obtain foreign currency, everything sold to obtain foreign currency is nothing other than the expression of the demand for foreign currency, including the labor supply by workers. Thus, unemployment arises when taxation creates a labor supply that the level of public spending fails to satisfy and bring to full employment. It is an unsatisfied demand for national currency, that is, a purely monetary phenomenon, which does not exist a priori in the monetary system, and which is a direct consequence of an insufficient budget deficit. 2 And, with the objective of achieving full employment, the State has at its disposal the Job Guarantee, both, on the one hand, as an expression of and complement to the main budgetary tool, the public deficit, and, on the other hand, as an economic stabilizer. 3
Full employment represents the framework within which MMT considers any economic debate should be launched. Indeed, before reaching full employment, the question is not which production should be chosen to the detriment of which other. At this stage, one can in fact produce more of any production. It is only when full employment is reached, and therefore when productive capacity reaches its limit, that the dilemma of choosing between one production or another arises. Full employment therefore represents for MMT the basic scenario within which any economic project must be framed.
2. Description of Eurozone Financial Operations
The analysis of Eurozone monetary operations presented in this article is based on the thinking of Warren Mosler,4 the inventor of MMT, a thinking that is itself fundamentally based on the concept of the state as a currency monopoly.
In the Eurozone, euros, or Net Financial Assets,5 are created by the entity represented by the consolidation of the treasury ministries of the member states and the ECB, when they spend. They therefore do not originate from abroad, as some economists might lead us to believe by writing that, for Eurozone member states, the euro is a foreign currency, without attempting to identify the level at which, within the Eurozone, the currency monopoly is exercised. However, since there is no European Treasury, even though they themselves participate in the creation of euros through spending, Member States control neither spending nor taxation with respect to the EZ as a whole. They therefore lack the ability to influence the economic dynamics of the EZ as a whole.
It follows that, while MMT can certainly describe the functioning of the currency at both the Member State and the EZ level, Member States considered in isolation cannot constitute autonomous units of analysis. The monopolist’s narrative can therefore only apply to the EZ as a whole, as it applies to other countries with a monopoly on their currency (the USA, Canada, Australia, etc.). Indeed, when we observe the accounting transactions between the various players in the monetary system of these countries, we realize that they are in every way identical to those of the EZ. Every public expenditure is the operation that creates euros, which flow into the private sector. And when taxes in euros are collected, these euros leave the private sector, as is the case for any other currency.
Beyond the fact that member states do not have currency monopolies, the EZ presents a particularity compared to other currency monopoly countries: EZ states operate within a framework containing financial limits, in effect self-imposed, namely the public deficit-to-GDP and debt-to-GDP ratios. These limits represent constraints on the fiscal policy of states, preventing them from running the deficit necessary to achieve full employment.
Another important consequence of the fact that member states do not have a monopoly on their currency, combined with their obligation to maintain a positive treasury account, is the need to raise tax revenues and issue government securities. This, due to the lack of ECB support, makes them dependent on financial markets. And, since the ECB does not guarantee the government securities they issue, these countries can default at the whim of the EZ, generating higher interest rates because they contain a risk premium. In any case, the fact that only the EZ as a whole can be considered the euro monopolist means that the demand for currency and the resulting labor supply can only be assessed at this level, and therefore the pursuit of full employment in euros, as well as the implementation of the Job Guarantee, can only be considered at this level, by increasing the EZ’s aggregate deficit. Indeed, unemployment is created in the EZ by EZ taxation. Certainly, internal dynamics within the EZ exist, which shift unemployment from one Member State to another, but the phenomenon itself—the creation of labor supply—only occurs at the overall level of the zone, through the consolidation of national treasuries and the ECB. This also means that, even in the presence of a European treasury, the financial limit formalized by the deficit/GDP ratio for Member States could not be completely removed, it being specified that this limit would not exist at the level of the European treasury, if it existed. Indeed, its removal would inexorably lead to the risk that a Member State that reached full employment would continue to run a deficit, which would generate a sharp increase in its imports, allowing it to benefit from real goods to the detriment of other States in the zone. This would lead to very strong competition between States in terms of increasing the level of public deficit, creating significant disparities between them, which would make no sense in an economic and monetary union.
Thus, MMT analysis shows that the EZ countries do not have control over their own currency, the euro, which must be analyzed like any other fiat currency,6 but within a limited framework. Indeed, due to self-imposed financial limitations, the EZ states do not have the ability to run a deficit sufficient to fully activate their productive capacity, either to achieve full employment or to attempt to achieve real objectives.
However, these limits on public spending have no economic basis. They are essentially political: self-imposed limits. It follows that the EZ’s biggest problem lies in the fact that austerity is in its DNA.
It is also interesting to note that the monetary system in the EZ can be compared to that of the United States. These two systems are similarly based on a central bank (the ECB and the Fed) branching out into several cost centers: the national central banks for the EZ states and the 12 regional banks in the US. However, unlike the Fed, the ECB is not under the control of a parliament. This therefore poses a fundamentally democratic problem.
Finally, if we compare the situation of the EZ member states with other public entities, we realize that the real difference between, on the one hand, a region of a state, or a federal state like the US, and, on the other hand, a EZ member state, lies in a different exercise of the monopoly on force. Regions and federated states do not have armies. California, for example, could not leave the dollar zone. However, France could leave the EZ because it has force on its territory and because the EZ does not have an army. The monopoly on power therefore resides within the national states of the Eurozone, while the monopoly on currency resides within the Eurozone itself. Another important difference lies in the fact that the US has a federal treasury, which allows it to avoid any federal deficit limit, which is not the case with the Eurozone.
3. Public Debt in the Eurozone
MMT adopts the accounting definition of public debt, namely, that it represents the sum of public deficits. It is equivalent to the national currency created by government spending that has not yet been used by the private sector to pay taxes. It therefore represents the net financial wealth of the private sector and is comparable to anything that represents the government’s liabilities: namely, the sum of cash, reserves, and government securities. Regarding the EZ, as we explained above, this reasoning only applies to the EZ as a whole, namely that the sum of the Member States’ debts represents the net financial wealth in euros of the EZ’s private sector.
However, for most non-MMTers, the definition of debt is restricted to government securities alone, and most reasoning is conducted as if it were private debt. They do not take into account either the creation of NFAs by public spending within the private sector for a state in its own currency, or the fact that public debt represents almost all of the state’s liabilities.
According to MMT, public debt is inherently of a strictly different nature from private debt. In the monetary process, public spending occurs upstream, thus creating bank reserves, and therefore currency. Private sector agents can therefore only purchase government securities if the upstream state has spent. When governments spend, they credit bank accounts, and when they sell Treasury securities, which are incorrectly called loans, they are simply transferring the national currency from one account similar to a depository bank account to another account similar to an interest-bearing savings account.
Thus, the sale of a government security to the private sector does not result in an increase in the quantity of national currency, which can only be created through government spending. This sale is nothing more than a change in the form of the currency, which goes from « reserve » to « government securities. » And this is also entirely true for the EZ. This means that when a government security matures, its repayment, in the opposite direction to its issue, only results in a change in the form of the currency by moving it from a government securities account to a reserve account, therefore without a reduction in the quantity of currency, a reduction which can only be the consequence of the collection of taxes.
And it is important to clarify that a state’s level of public debt in its own currency is not a problem and is not significant. The example of Japan, whose public debt ratio is 240% of GDP, is sufficiently eloquent. And, beyond the fact that the public debt-to-GDP ratio makes no economic sense, observing the situation in countries around the world clearly shows that austerity can be implemented even in countries with low public debt levels.
Finally, as stated above, the aggregate public debt of the EZ member states represents, in euros, the aggregate net financial wealth of the private sector, understood as including both residents and non-residents who hold foreign currency, in this case the euro. That said, when a member state spends, it creates NFAs primarily for the benefit of its residents. An increase in the deficit in a EZ country therefore primarily increases private savings, primarily in that country, even if these savings can be shifted to other EZ states.
It follows from the above that talk of public debt as a « burden » or a « cancer, » or of a « wall of debt, » is completely unfounded. And, beyond the fact that the debt ceiling-to-GDP ratio in effect in the EZ has no economic basis (debt is a stock and GDP is a flow),7 calls for the cancellation of this debt, whether held by the private sector or by the ECB, only fuel the phobia of public debt that prevails today, which is totally irrational and unfounded.
4. What options for the Eurozone?
MMT economists propose various options for the future of the Eurozone.
Some, like Bill Mitchell, advocate a straightforward exit from the euro. This solution is analyzed as the only one that would restore the EZ states’ full capacity to create their own currency, thus making them total monopolies of their currency. They would thus be freed from their dependence on both the undemocratic body represented by the ECB and the financial markets. They would regain unconstrained fiscal space, become completely autonomous in defining their fiscal policy, and would therefore find themselves in the best position to achieve full employment.
Warren Mosler advocates a process based on a Plan A containing two measures aimed at giving member states a much greater spending capacity: raising the deficit-to-GDP ratio from 3% to 8% or even 11%, and requiring the ECB to systematically guarantee public debt, with this guarantee completely eliminating the risk of default for these states. Under these conditions, the EZ states would certainly not be able to fully steer their economies towards full employment, as their deficit levels would still be constrained, but they would still be taking the lead. States could also rely on the Job Guarantee, which would be implemented not at their own level, but at the EZ level, and which would also allow them to target price stability. 8 A Plan B, serving as leverage to strengthen the chances of implementing Plan A, would consist of Member States returning to using their national currencies to pay taxes, which would give them some room for spending. 9 States would thus have independent monetary and fiscal policies and could regain prosperity.
All MMT economists support the idea of a universal, state-funded Job Guarantee program, which would support the process of achieving full employment and act as a macroeconomic stabilizer in times of crisis. This would involve putting beneficiaries to work when the economy weakens, and allowing the private sector to rehire them as the economy recovers. However, as explained above, this measure could only be considered at the EZ level. Indeed, if implemented in a single EZ state, it would inevitably generate an unbalanced situation highly favorable to the benefit of that single state, and thus to the detriment of the others.
Another avenue, presented by Pavlina Tcherneva and Dirk Ehnts, would involve establishing a European treasury, which would thus mark the EU’s move toward federal status. Under these conditions, the Job Guarantee advocated by MMT, both as a tool for achieving full employment and price stability, would find a much more favorable scope for its implementation at the level of the entire zone.10
Thus, in a logic of remaining in the euro, the priority of priorities consists of restoring to the Member States, in a sustainable manner, their capacity to spend, in accordance with the recommendations of Plan A referred to above. It is important to specify that these recommendations could be implemented immediately, without major institutional changes. It is indeed worth remembering that the financial constraints currently imposed on the Member States of the EZ have no economic basis. They are political.
Notes
1 For a complete presentation of these elements, the reader will usefully refer here : https://fr.wikipedia.org/wiki/Th%C3%A9orie_mon%C3%A9taire_moderne
2 See : https://mmt-france.org/2019/05/02/fiche-n-4-chomage/
3 See : http://www.levyinstitute.org/pubs/wp_902.pdf
4 See : https://mmt-france.org/2019/09/14/a-pure-mmt/
5 At the heart of MMT logic, considered in the context of the state’s monopoly on its currency, we find the concept of Net Financial Assets (NFA). These are created by public spending and then destroyed by taxation. MMT « reasons » in net financial terms, and thus distinguishes itself from all other monetary approaches, both orthodox and heterodox, which « reason » primarily in gross financial terms, and never by considering the national currency as a state monopoly.
6 Fiat currency is a government-issued currency convertible only into itself, as opposed to a fixed-rate national currency such as a gold standard or other currency with convertibility into any other commodity or national currency fixed by the issuing state (such as currency boards, pegged national currencies, or currency unions). The United States, Japan, and most of the world’s industrial economies are examples of such monetary systems, including the Eurozone, although individual countries are no longer the issuers of their national currencies.
7 See https://www.leparisien.fr/economie/derapage-budgetaire-ce-qu-en-dit-guy-abeille-le-pere-des-3-16-12-2018-7969758.php
8 See : http://moslereconomics-kg5winhhtut.stackpathdns.com/wp-content/uploads/2019/02/Full-Employment-AND-Price-Stability.pdf
9 The process of returning to the use of national currencies proposed by Warren Mosler is completely different from that which is usually proposed. Voir https://www.youtube.com/watch?v=LQRgJPEAvIM
10 See : http://www.revistaeconomiacritica.org/sites/default/files/revistas/Revista_Economia_Critica_27.pdf
MMT France 