Is Euro a FIAT currency?

[Pietro]

I am not sure if the Euro is a FIAT currency or not. What is the difference between a “sovereign currency” and a FIAT currency? Europe is a kind of government, so in a certain way it does issues and declares the Euro, but on the other hand a single country of the 17 that composes the “Euro zone” doesn’t have any indipendent control on the Euros. To be honest I am a bit confused!!

[DustinModerator]

The Euro really is a new kind of currency. It does meet the traditional definition of a fiat currency, that is, it is non-convertible. It is certainly not a Sovereign currency either at the Euro level(yet) and especially not at the individual state level.

The easiest way to think of the Euro and how it works is to start with another country that does have a Sovereign currency. Like say the U.K. or Japan. Then, take away the entire national government except for the central bank. Controlling the currency by spending and taxing(or “fiscal policy” to use the economist term) is no longer an option. The only way to influence the currency is through interest rate manipulation. Now let’s make things even worse. Even the little bit that monetary policy can do, even that is handicapped. Whereas in the U.S. or Japan, the central bank can bail out a province or the national government by buying all of their debt. The central bank isn’t allowed to do even that in Europe. (although I think it ended up doing just that and everyone looked the other way in a very semi-legal move)

Therefore, in Europe, only banks and people are allowed to buy a country’s debt. That is the problem currently vexing Europe – if they choose not too, then you can have a very real debt crises for the country. In a nation that is sovereign in their own currency, you never have the problem because the central bank can simply buy up the debt and that drives down the interest rate.

So, while one could argue that the Euro is a “fiat” currency since it doesn’t convert into a physical asset like gold, as far as individual nations like Greece and Italy are concerned, it is as fiscally limiting as a gold standard. Therefore, MMT people definitely would not call it a “Sovereign” currency. Not until there is a fiscal authority and the European bank is allowed to buy it’s debt(or the fiscal authority can spend debt free money).

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