by

Robert Cauneau

27 May 2025

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Introduction: A Common but Ambiguous Concept

The term « monetary sovereignty » is frequently used in economic and political debates, evoking national independence and the capacity for action. However, this apparent clarity often conceals a concept with imprecise contours. When misunderstood, it can obscure rather than illuminate true monetary dynamics and states’ room for maneuver. This confusion is all the more problematic because it also hinders the understanding of certain heterodox economic approaches, such as Modern Monetary Theory (MMT)¹, whose analysis is precisely based on a rigorous interpretation of the role of monetary institutions. This article aims to deconstruct these ambiguities, drawing in particular on the clarifications provided by MMT, to propose a more functional interpretation of state powers and constraints.

1. The Limits of the Classical Definition and the Trap of « Degrees » of Sovereignty

The traditional view often defines monetary sovereignty through a catalogue of formal and legal criteria: the issuance of a national currency, a flexible exchange rate, the ability to borrow in one’s own currency, and control over one’s central bank. While this approach identifies certain attributes, it tends to mask the complexity of the real constraints, whether political, institutional, or, crucially, self-imposed.

The main pitfall of this notion lies in its lack of rigor and the pernicious idea that there are « degrees » of monetary sovereignty. This perspective, sometimes fueled by analyses linking monetary capacity to exogenous factors such as food self-sufficiency or the depth of financial markets, leads one to believe that only a few countries, typically the United States, have full latitude to pursue ambitious fiscal policies or aim for full employment. This leads to fatalism in many countries, suggesting that full employment would be a structural utopia for them. Such a concept of a « spectrum » of sovereignty is thus deemed vague, theoretically unsound, and impractical for communication, lending itself easily to misinterpretations.

2. A Clear Demarcation Line: The Power to Create the Currency of Taxation

To break out of this conceptual impasse, it seems much more effective to ask a fundamental, binary question: does the political authority, i.e., the state, have the power to create the currency in which it levies taxes? This distinction is central. If the state controls the currency of its fiscal and budgetary operations, it enjoys fundamental autonomy. MMT, moreover, anchors the value of a state currency in this legal obligation to pay taxes with this specific monetary unit. It is not an abstract social trust that establishes its primary value, but this legal constraint that generates demand for the state’s currency. The value of a state’s currency is thus not directly linked to its level of economic dependence, but to what the monopoly state requires economic agents to do or provide to obtain the next monetary unit, regardless of the level of unemployment or austerity it decides to impose.

3. Financial Autonomy and Economic Dependence: Two Distinct Dimensions

Having established that a state’s ability to issue the currency in which it taxes constitutes the foundation of its monetary autonomy, it becomes imperative to dispel another major confusion, a frequent source of misunderstandings and erroneous political conclusions. This confusion lies in the conflation of a state’s financial capacity (its ability to create and spend its own currency) with its actual economic situation (its dependence on external resources, technologies, or markets). Without a clear distinction between these two dimensions, one risks wrongly concluding that economic dependence necessarily implies a limitation of internal financial capacity, thus curbing political ambitions in terms of employment or public investment. This is why it is essential to separate the analysis of financial autonomy from that of economic autonomy or dependence.

Financial autonomy (or the absence of financial dependence) characterizes a state that has a monopoly on its currency in a floating exchange rate regime². It does not face nominal limits on its spending in its own currency and can therefore technically finance its expenditures and progress toward full employment. This autonomy is not a matter of geopolitical status but of monetary structure.

Economic dependence, on the other hand, is defined by the need to import goods and services essential to the development and maintenance of the national economic structure. This situation is exacerbated when these imports are subject to a certain degree of monopolistic power on the part of foreign suppliers. This dependence can be technological (sophisticated industrial machinery), energy (oil), linked to access to infrastructure (ports for a landlocked country), or specific resources (water from a transboundary river). For less developed countries, food dependence can also be a major issue.

It is crucial to understand that economic dependence imposes qualitative constraints on the country concerned, influencing the nature of the goods and services that can be produced. However, it in no way influences the quantity of labor that can be activated at the national level. A country can be economically dependent without being financially dependent, and vice versa. A country like New Zealand can maintain full employment despite a high level of economic dependence requiring it to import many products. Failing to recognize this distinction is tantamount to considering that the state cannot run a sufficient deficit to achieve and maintain full employment, even if it creates its own currency.

4. Identify the Nature of Constraints: Externally Imposed vs. Internally Chosen

It is now crucial to understand that financial autonomy, as just defined, does not imply a total absence of limits. The actions of a monetarily autonomous state are often framed by a set of constraints. To properly analyze its real room for maneuver, it is therefore essential to clearly distinguish the nature of these constraints: those imposed externally, directly affecting the very substance of its financial autonomy, and those resulting from internal political choices, which regulate the exercise of this autonomy without eliminating it. This distinction is fundamental to avoid confusing structural incapacities with voluntary limitations on public action.

External and Imposed Financial Constraints: Those that Negate or Reduce Financial Autonomy These constraints directly undermine or nullify financial autonomy. A state using a foreign currency (such as Ecuador with the US dollar) by definition renounces the issuance of its own currency; it becomes a simple user of currency, just like a household or a business. Its spending capacity is then conditioned by its ability to obtain this foreign currency (through exports, external borrowing, etc.), which deprives it of the room for maneuver necessary to guarantee full employment or finance public services according to its own priorities. Similarly, countries with fixed exchange rate regimes, such as those in the FCFA zone, although technically issuing their own currency, subordinate their monetary and budgetary policy to the defense of a fixed parity with an anchor currency (the euro). This obligation forces them to accumulate and maintain reserves of this foreign currency, thus limiting their ability to spend their own currency for internal objectives, for fear of compromising the parity. Financial autonomy is significantly eroded here by external commitment.

Self-imposed constraints: Those that frame the exercise of financial autonomy Conversely, these constraints are rules, laws, institutions or political objectives that a State, which has its financial autonomy (it issues its own currency in a floating exchange rate regime and taxes in this currency), chooses to apply to itself. A fixed exchange rate decided sovereignly (different from that suffered in a framework of dependence) is a self-limitation on the exercise of monetary policy. Other examples include strict budgetary balance rules (« golden rule »), the prohibition of direct monetary « financing » of the Treasury by the central bank, ceilings for the public deficit and debt, or the obligation to maintain a permanently positive balance in the Treasury account at the central bank. These constraints, although having limiting effects on economic policy – the fixed exchange rate condition or strict fiscal rules not being compatible with the objective of full employment – do not eliminate the intrinsic financial autonomy of the State. They represent political choices about how to use this autonomy. They are therefore, in principle, reversible by a subsequent political decision, unlike external constraints which often require a structural break.

5. The Case of the Eurozone: A Special Perspective

The example of the eurozone³ provides a better understanding of how financial autonomy can exist operationally while being politically neutralized. This case shows that it is not a privilege reserved for « rich » countries, but an institutional choice, which can voluntarily restrict the use of a very real monetary capacity.

The euro is a currency with a floating exchange rate, created by an authority (the entity represented by the ECB and national treasuries), resulting from European integration. In this sense, the eurozone, as a whole, has its own currency. It is the monopolist. Every euro spent by a Member State is, operationally, a creation of a net financial asset⁴ in euros.

However, Member States are no longer « sovereign » in the traditional sense, as they no longer individually create their own currency and do not set their interest rates. The rules they have collectively imposed constitute powerful self-imposed constraints, limiting their fiscal policy. Moreover, political power imbalances (the weight of Germany versus Greece, for example) influence decisions, but this is a matter of internal institutional and political governance within the zone, rather than a lack of « monetary sovereignty » of the euro itself.

Conclusion: Clarify to Free Up Public Action

Rather than getting bogged down in an abstract debate on the « degrees » of monetary sovereignty, which tends to confuse responsibilities and legitimize inaction, it seems much more fruitful to return to an operational approach: does a state have its own currency, in which it taxes? Yes or no. This apparent simplicity, highlighted by MMT, allows us to better understand where the real levers of public action lie.

Replacing the overly vague expression « monetary sovereignty » with the more functional term « financial autonomy, » based on the capacity to create money, is a choice to clearly define things. And clearly naming these issues creates the conditions for a lucid political debate.

Contrary to a frequently voiced criticism, this approach is neither limited to the United States nor reserved for the countries of the Global North. Any state that creates its own currency, requires it as tax payment, and does not owe foreign currency, enjoys this financial autonomy. This potentially includes many countries in the Global South. That this autonomy is subsequently neutralized by other dependencies—external debt, foreign currency pegs, conditionality from international financial institutions—is a reality, but it should not be confused with a lack of its own monetary capacity.

This clarification makes it possible to identify the constraints to which a state is subject: are they external, structural, or self-imposed and therefore politically reversible? It also allows us to refocus the debate on collective choices: do the institutions and rules governing monetary power serve democratically defined objectives (full employment, ecological transition, public services) or are they merely accounting fictions and special interests?

Understood in this way, financial autonomy is not a guarantee of social justice or economic efficiency, but it is a prerequisite. It must also not be neutralized by myths, unnecessary rules, or artificially maintained dependencies. For it is only by fully liberating the capacity of states to act that economic policy can truly be put at the service of the common good.

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Notes

1. This blog presents the fundamental articles relating to MMT : https://mmt-france.org/
2. See this article : https://mmt-france.org/2020/05/31/finances-publiques-et-espace-politique-les-2-alternatives/
3. See this article : https://mmt-france.org/2025/05/25/mmt-and-the-eurozone/
4. The concept of net financial assets (NFA), considered in the context of the state’s monopoly on its currency, is at the heart of MMT. It distinguishes MMT from all other monetary approaches, both orthodox and heterodox, which reason in gross terms, not net terms. In the logic of MMT, NFAs are the financial basis on which the economy rests; they are the financial wealth that remains with the economic agent once all their debts have been settled. They constitute the part of financial wealth that does not come from debt (bank credit), but from final payments (in relation to the state through public spending).