Revisiting MMT, Sovereign Currencies and the Eurozone: A Reply to Marc Lavoie

This paper responds to a presentation and paper published by Marc Lavoie that summarizes points of agreement and disagreement between Modern Money Theory (MMT) and Post Keynesians more generally. In particular, we examine MMT’s view on the conditions required for monetary sovereignty and apply that to the evolution of the conditions in the Euro area. We conclude that while there was a problem with the original set-up of the Euro system, this has been resolved in the aftermath of the global financial crisis and the more recent COVID pandemic. The Euro area's institutions allow some flexibility, allowing national governments to act as unconstrained currency issuers in times of crisis. The ECB's role of dealer of last resort for government bonds has made this possible, together with the general escape clause in the Stability and Growth Pact that was inserted in 2011 and allows to shut down the excessive deficit procedure which is the major constraint of the fiscal framework. We agree with Marc Lavoie that the fiscal framework is the real constraining factor explaining the weak macroeconomic performance. Finally, we address a few remaining misunderstandings over the MMT position on so-called ‘consolidation’ and on external constraints facing monetarily sovereign nations.