Euro (9) — Creating Credit- and Default Risk Where Non Existed Before, Thereby Stunting Fiscal Capacity

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In joining the Maastricht treatise, formerly fiscally sovereign countries have saddled themselves with credit- and default risk that they did not carry before and accepted a significant stunting of their fiscal capacity, i. e. their ability to run countercyclical fiscal policies to counteract and avoid economic downturns, adjusting the budget to keep the economy balanced at the level of full employment.

The question put to Bill Mitchell is whether the Spanish government, being a member state of the Eurozone, is in a position to increase the public debt to reduce unemployment, i. e. pursue socially responsible, countercyclical strategies of public finance. His answer:

Writes Bill Mitchell here.

Let us be absolutely clear:

1. The private bond markets have no power to stop a currency-issuing government spending.

2. The private bond markets have no power to stop a currency-issuing government running deficits.

3. The private bond markets have no power to set interest rates (yields) if the central bank chooses otherwise.

4. AAA credit ratings are meaningless for a sovereign government – they can never run out of money and can set whatever terms they want if they choose to issue bonds.

4. Sovereign governments always rule over bond markets – full stop.

Matters are different when a currency-issuing government gives up its monetary sovereignty by replacing its own currency with a foreign currency. This is exactly what the EU-member states have done by joining the European Monetary Union ("the Euro").

That is they have created a situation whereby they have accepted detriment they were not exposed to before, as now they are liable

• to be at the mercy of private bond markets, i. e. a government not being able to borrow from the private markets sufficient funds to cover its deficit,

• to be hindered to spend as they see fit,

• to be hindered to expand the fiscal deficit as they see fit,

• to lose the ability to determine the level of interest rates,

• to lose the ability to issue enough currency to stay solvent under any conceivable economic conditions.

Now, the only institution that has the ability and may deign to intervene to avoid the insolvency of an EU-country and finance the deficit of a member state is a bureaucracy called European Central Bank (ECB). The economic fate of a country is removed from the processes of democratic control and shifted to technocrats clearly in the service of the neoliberal agenda of austerity.

By contrast, by exiting the Eurozone, what member states like

... Greece would get back would be its own central bank and its currency issuing capacity. It would then move from using a foreign currency and having to fund all its public spending via taxes and then borrowings (now bailouts) to a situation where it issued its own currency and became free of any financial constraints.

Its Euro-denominated debt would fall to zero.

Its capacity to spend would not be constrained by tax revenue and it would be in a position to pursue whatever growth strategies it thought suitable for its citizens and industry structure.

The Report seems to misunderstand that being in the Euro imposes constraints that would not persist if Greece was out of the Eurozone. That is the whole point of exiting – to restore currency sovereignty and create possibilities that are non-existent within the Euro.

For more on the reasons, the processes and the consequences of government defaults go here and here and here and here.