I was asked this question yesterday:
One point that I find difficult, is how does MMT apply to the Euro? If the Euro is produced by the ECB, how is it distributed through the Euro user nations? Does Tax and Spend apply to Euro user nations, ie do they have to gather the funds for their spending through tax or is there a mechanism whereby they can instruct the ECB to issue payments on their behalf?
This is my answer, which I admit is short because of the 400-word limit on replies on this blog, which I also impose on myself, but I think it is a good starter for ten on this issue:
This is an important question, because MMT applies to the eurozone, but the conclusion is different because euro-using states are not currency issuers. They are, in effect, currency users.
The euro is issued by the European Central Bank (ECB) and the national central banks (collectively called the Eurosystem). But the key point is that EU member states do not have complete control over the issue of their currency. Italy, Spain, Greece, Ireland, and so on, cannot, as such, instruct their own central bank to create euros to fund government spending in the way the UK Treasury can instruct payments in sterling.
So, euro governments do still “tax and spend” in the operational sense: they collect taxes, they issue bonds, and they use those resources to finance spending. They spend by instructing payments through their national central bank and commercial banking system, but they cannot create new euros at will. The ECB ultimately controls the conditions under which liquidity and reserves are provided to them.
We saw the consequence in 2008. Eurozone countries were in positions more akin to those of UK local authorities, or US states, than that of the UK government. Technically, they can bust, or at the very least, they face genuine solvency risk, as Greece proved, and markets can price their debt like private debt.
So the question is, can they instruct the ECB to pay on their behalf? No, not directly as a matter of democratic control. The ECB can support member state bond markets (as has happened), but it does so on its own terms and with conditions, and it has often used that power politically.
This is the heart of the critique: the euro created a currency without a unified fiscal authority, leaving states responsible for social welfare without monetary sovereignty. As a result, austerity has been imposed, often selectively, not because resources were unavailable, but because currency control had been ceded.
So, MMT still describes what money is and how it works, but it also shows why eurozone states face much harsher constraints than the UK.
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Someone who is very knowledgeable about Modern Money Theory (MMT) and the Euro, is Dr Dirk Ehnts.
Sources
Dirk Ehnts – The Eurozone is Fully Committed to Modern Monetary Theory (MMT) (2020)
https://braveneweurope.com/dirk-ehnts-the-eurozone-is-fully-committed-to-modern-monetary-theory-mmt
Modern Monetary Theory and European Macroeconomics (2017)
https://www.amazon.co.uk/Monetary-European-Macroeconomics-Routledge-International/dp/1138299928
MMT & the Euro
https://www.youtube.com/watch?v=9apN0OWsF8Q
Agreed
This looks very promising for sure, but my God, it’s now 2026 and they seem to be taking their time and we are already on the slip way to Fascism. They need to get their act together.
Good description. The Euro is unfinished business, but member states are uncomfortable (perhaps understandably) at cedeing tax raising powers to “Brussels” (sound familiar?). However, a range of stresses and strains (Ukraine, USA-Trump, right-whinge rise) are starting to focus minds. Bureaucrats within the three legs (Commission, Parliament, Council) now recognise that “summat has to be done” wrt the financing of the big stuff (de-carb, weapons, infrastructure).
Most of the core elements are in place e.g. Euro Investment Bank (EIB), SAFE (weapons), plus other bits an pieces. Problem 1 who instructs the ECB, parliament? (cann’t), member states (hmmm). Probelm 2: Which org decides who gets how much money? Coupled to this: Industry Strategy (what, how funded, which country/region gets the benefits?) – still largely member states “doing their own thing”.
History has shown that a failure to unite/have common purpose leads to extinction. Both the USA and Russia would like the EU as a collection of poodles (the UK is already poodle of the USA – any politico that takes an independent line gets destroyed). Interesting times.
Thank you for the clarification.
I thought that was probably the case, but wasn’t sure if there was some mechanism that provided some degree of freedom for individual governments.
Of course, MMT applies to the Eurozone, it applies everywhere there is monetary sovereignty.
The only difference is the institutional set up that makes money creation by government spending slightly more difficult technically…. and vastly more difficult politically.
Eurozone governments can’t order their own Central Bank to pay (like the UK can with the BoE). So, the process has to be conducted via ECB bond buying… which cannot be ordered by a single EU state. Indeed, the Maastricht Treaty forbade QE (as it does in Denmark and Sweden, too- EU members but not Eurozone members)…. but as we have seen, necessity is the mother of invention and QE did happen (despite Germany’s best efforts).
So, whilst an individual state does not meet the requirements laid out by MMT to allow money creation, as a group they do and in practice (through QE) this has happened…. albeit with the pace and reluctance commensurate with a large group of countries that includes Germany.
Given the reluctance of the UK to acknowledge the truth of MMT and act accordingly the difference between the UK and the Eurozone is moot.
Agreed
The Eurozone is not a state. Of course that doesn’t people thinking about the euro zone in MMT terms. The Euro zone is institutionally very conservative. It was setup prior to reunification of Germany. A completely different world. The rules need to change.
Indeed, very conservative – made in the image of Germany and the Bundesbank. But time has moved on and although rules have not changed ‘de jure’ they have ‘de facto’. Eg. The Maastricht Treaty forbids “monetary financing”… but QE happened. It also says “no bail out”…. but Greece was bailed out (albeit with harsh conditionality).
My point is, that Europe can be flexible and institutions and rules do evolve.
(In many ways, the sadness of Brexit is that the EU had bent over backwards for the UK with opt outs, rebates etc.. It was also trying to tackle many of the issues that vexed UK Brexit voters – yet the voters could not see it.)
Agreed.
Absolutely right. Europe is flexible when it comes to rules, something the UK never really understood.
So how are joint projects funded such as rearmament? The process is too slow if all member states have to agree and they have to tax before spend. Resistance to US dominance looks like a lost cause already.
It’s amazing what can happen when nations are threatened.
I’d love to rejoin the EU, however, if adopting the Euro was the concession we needed to make, I’d rather be outside of it. It’s more important that a nation state has the power to issue it’s own currency, I think.
We wouild not have to join the euro.
We’d have to commit to doing so.
Sweden did in the 90s. It never has. We could engineer that too.
It occurs to me that perhaps a more empowering financial arrangement for Europe would be a version of Keynes’ Bancor system rather than a single currency. Could that work?
No
That was not what the euro was ever meant to do.
Thanks for this. You have answered a question I was recently pondering but hadn’t gotten around to researching.
Yes, the powers that be will spend money to kill people but not to keep the healthy.
Interesting post, I had wondered about Euro countries, seeing what happened to Greece and was threatened to other countries, whether there was any path to some kind of monetary sovereignty. Many interesting & enlightening comments too.
And a welcome rest from the dire state of world affairs – I would take a walk but biblical rain reigns today.
Always insightful thank you Richard. I hate to be the one of negativity, but seems long term more and more implausible to operate under the approach the euro currency functions. Keep the eu, maintain monetary sovereignty, much like the UK during its time in the EU. Alas, I recall your previous article noting how the EU likewise has a number of unreasonable rules around currency issuance to maintain the illusion of bond market dependence, hence QE was utilised post 2008 due to a number of EU rules I recall.
Keep up the good fight :).
And in the UK the tax & spend lies continue to be reported without challenge…..
“The Government currently has no plans to increase the Personal Allowance to £20,000. Increasing the Personal Allowance to £20,000 would come at a significant fiscal cost of more than £50 billion per annum.
This would reduce tax receipts substantially, decreasing funds available for the UK’s hospitals, schools, and other essential public services that we all rely on.
A £50 billion cut in public services is equivalent to slashing roughly a quarter of the NHS Budget, or around 80% of defence spending.”
https://archive.ph/20260118234746/https://www.heraldscotland.com/news/25775507.hmrc-income-tax-personal-allowance-rise-petition-20-000-response/#selection-1803.3-1807.302
Dear Richard,
Topic proposal as follow-up:
Could you please elaborate on how we might align important goals and methods of progressiv macroeconomics (how you would propose them) with seemingly contradicting microeconomics needs, goals and abilities?
It seems to me, lasting discrepancies of both aspects of economics lead to our current state and neoliberal agenda and prevent more social and progressive developments.
Examples:
– competitiveness and everlasting growth vs. Saturation of demand for goods (how many cars does everyone need or could buy)
– possibly lowest wage costs vs lacking (domestic) consumptive power
– taxation avoidance, since they are like costs or less profit for companies, versus some taxation is unavoidable even when running high enough deficits
Cheers
Ricco Lindner alias ProgressiveEconomicsSupporter
–
Thanks. I might answer this in a post. Can it wait until tomorrow?
I see this a little bit differently:
The ECB does not run an overall ledger. Every member state has its own ledger.
Issuing a currency has 2 aspects:
1. determining which currency will be legal tender
2. spending the currency into existance.
The first aspect has been done by the ECB on behalf of the member states.
The second aspect is for each government of the member states.
The ECB is the combination of all the central banks of the member states.
So, there’s not too much difference compared to UK or US.
As is already been said: see the work of Dirk Ehnts.
As I said, MMT works, within constraints.
The constraints seem to vary depending on who you are.
Right. The banks of the Euro countries are collectively the ECB and the national governments spend the currency into existence via the national budgets and delete it via their tax systems. So they are all jointly currency issuers. Of course that is done within the guardrails of the treaty. Weather the guardrails are enforced is a second question, but they all pretty much keep to them. Most MMT economist say that they are to tight in the EU. That the EU is under spending and this restricts the economy of the Eurozone.
But the statement that the national states are currency users is misunderstanding the ECB. The office in Frankfurt is HQ, no more. It is not a bank! The policy is set in the meetings there by the central bankers of the eurozone countries. And the consequents of the ECB activities, like QE manifest themselves on the ledgers of the national central banks – in proportion to their sizes.
It is like the EU: sovereign states and the heads of state set policy and make decisions in their metings.
But this underestimates the power relationships. What you say works for large euro states. I question whether it does for them all. I think you are ignoring that. Political economy matters here, not the form of the deal.
Everything is always under discussion in the EU, it definitely matters if you are big or small. Rules are the same for everyone but the countries are not the same and there are lot’s of countries exceeding debt limits and/or deficit limits: https://english.rekenkamer.nl/topics/e/european-union/impact-of-eu-policy/how-does-the-eu-ensure . Right now for ReArm Europe there are exception clauses etc.
But they are all currency issuers, bound by the Stability and Growt Pact.