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Monetary sovereignty and the funding of the economy in the #euro area. Thread 1/6
Every currency has an issuer that is “sovereign”. The € issuer is the ECB created under the shared sovereignty of 19 States. States agree to prohibit that the ECB gives unlimited support to any of those States. Thus, only private debt or exports fund the private sector. 2/6
This would be ok if the States in the euro area (EA) requested that the ECB support the financing of commonly agreed public expenditures. Because they don’t, the source of funds for each State is limited to two options: boosting private debt or net exports, creating dualism. 3/6
Countries boosting private debt sustain aggregate demand. Countries boosting net exports take advantage of foreign demand. During recessions, while the former are at risk of private and public default, the latter have more room for maneuver. This also creates “yield spreads”. 4/6
The 2012 ECB’s choice to give conditional support to States, in accord with the EU, removed States’ default risk. Yet, the risk that a State politically decides to default on € debt and leave the € persists. The remedy is self-sustained, shared, inclusive growth in the EA. 5/6
This cannot occur under the current political constraints. The demand that the EA shapes a politically acceptable framework for funding commonly agreed public expenditures has become as urgent and critical as it was the demand for ECB regime change in 2012. 6/6
