How a eurozone government spends

When a eurozone government spends, its national central bank, acting as the government's fiscal agent, credits the bank accounts of the people and firms being paid. Tax receipts and bond sales then bring the government's account back to zero by the end of the day. That daily rule is a political agreement written into the EU treaties, not a technical limit, and what governments agreed they can change. Government spending in the eurozone is money creation; the state spends first.

Every eurozone government keeps its main account at its own national central bank, which acts as its fiscal agent. In Germany, for example, this is the Bundesbank, and the federal debt management agency (the Finanzagentur) sells federal bonds to a group of banks through an auction platform the Bundesbank runs. When a ministry makes a payment, the central bank credits the reserve account of the recipient's bank, and that bank credits its customer. Money held by the government at its own central bank is not part of the money supply, however that is measured: like a cinema ticket that only becomes a ticket once it is handed out, it only becomes money when it is paid out.

Article 123 of the Treaty on the Functioning of the European Union prohibits overdraft and other credit facilities for governments at the ECB and the national central banks, and prohibits those central banks from buying government debt directly from them. What it rules out is the account being negative, not the spending, and it is a political agreement between governments, not a technical limit, so it can be changed by agreement. In practice spending pushes the account below zero during the day, tax receipts push it back up, and any gap is closed by selling bonds, so the account ends the day at zero or above. No borrowing has to happen before a payment is made, which makes eurozone practice even closer to the MMT description than the United States, where the Treasury sells bonds before it spends.

Bond sales do a monetary job as well as a fiscal one. Government spending adds reserves to the banking system and taxes remove them; selling bonds absorbs the difference so the money market is not disturbed. Fiscal and monetary policy are therefore always intertwined. The same mechanics apply outside the euro: in Sweden the National Debt Office nets every agency's payments each day at the Riksbank and issues or repays debt to cover the balance.

One common account of the eurozone has national central banks borrowing from the ECB and lending the proceeds on before their governments can spend. That is not how government payments work: each national central bank executes its own government's payments directly.

Isn't this just a technicality, since the government still has to sell bonds? The bonds are sold after the spending and are bought with reserves the system already holds or can borrow from the central bank against collateral. What limits a eurozone government is whether buyers keep taking its bonds, and that depends on whether the ECB stands behind them, not on any shortage of euros.