The importance of currency sovereignty

Although it should seem obvious, the ability of democratic governments to issue their own currency is perhaps the most important thing any government does. Economic models that apply to fixed exchange rate currencies simply do not apply to floating currencies, a point that many economists seem to have tragically missed. For some reason, even smart economists like Paul Krugman have been "surprised" that currency sovereigns operate under completely different economic realities than pegged or non-sovereigns do. The reality is that the loanable funds and money multiplier models simply do not apply to currency sovereigns, nor should they.

The ability to issue its own fiat currency is critical to the ability of any government to make public policy for its citizens, and thus is a crucial element to any nation that claims to be a democratic sovereign. Surrendering currency sovereignty, as Argentina did in the 1990's, and the Eurozone nations did in 1999, is an enormous leap away from democratic sovereignty. Any government that does so significantly weakens its ability to move real resources around its country to maximize utility for its citizens (Argentina's currency board basically turned the country into an internationally-financed Ponzi scheme). The importance of this seems to have been greatly under appreciated during the 1990's and 2000's, when countries in Europe were falling all over themselves to join the Euro and abandon their currency sovereignty. And although the British economy has faced its own challenges from misguided policies of the Cameron government, they can at least congratulate themselves on having had the restraint to stay the hell away from the Euro.

Now the Eurozone has been stuck in nearly 6 years of disastrous depression, with sky high unemployment levels and continually contracting economies. The only option sufficient to restore growth, namely default and devaluation from the periphery countries (Portugal, Italy, Spain, Greece, or the PIGS) has been considered Verboten by the policy elite that have been so disastrously ruling Europe. The so called "Troika" of the European Central Bank, the European Commission, and the IMF, have been unbelievably bad economic policymakers, for the precise reasons that they don't understand the benefits of currency sovereignty, have considered default a non-option, and refuse to ever admit their errors. (As a GW student, I regularly walk by the IMF building and witness the international house  of (t)errors of European bankers standing outside and smoking cigarettes in their $2500 Italian suits.)

The callously indifferent responses of these policymakers to the ever growing demonstrations of discontent in the EU have been equally disturbing. This response suggests that in the future, a country that gives up its currency might as well also dissolve its legislature and end elections. Countries that are constrained by foreign central banks or arbitrary debt/gdp ratios simply cannot meet the economic needs of their citizens, especially during times of economic difficulty. Relying on foreign investment or bond market "confidence" to boost an economy has proven to be an incredibly difficult, if not impossible proposition. No government that calls itself politically sovereign can really be so if their economic output is determined by the whims of foreign investors.