The political economy of monetary solidarity : understanding the Euro experiment / Waltraud Schelkle.

Format:

Book

Author/Creator:

Schelkle, Waltraud, author.

Language:

English

Subjects (All):

Economic and Monetary Union.

Monetary policy--European Union countries.

Monetary policy.

European Union countries.

European Union countries--Economic integration--Political aspects.

International economic integration--Political aspects.

Physical Description:

xii, 370 pages : illustrations ; 24 cm

Edition:

First edition.

Place of Publication:

Oxford, United Kingdom : Oxford University Press, 2017.

Summary:

Creating the European monetary union between diverse and unequal nation states is arguably one of the biggest social experiments in history. This book offers an explanation of how the euro experiment came about and was sustained despite a severe crisis, and provides a comparison with the monetary-financial history of the US. The euro experiment can be understood as risk sharing through a currency that is issued by a supranational central bank. A single currency shares liquidity risks by creating larger markets for all financial assets. A single monetary policy responds to business cycles in the currency area as a whole rather than managing the path of one dominant economy. Mechanisms of risk-sharing become institutions of monetary solidarity if they are consciously maintained, but they will periodically face opposition in member states. This book argues that diversity of membership is not an economic obstacle to the success of the euro, as diversity increases the potential gains from risk sharing. But political cooperation is needed to realize this potential, and such cooperation is up against collective action problems which become more intractable as the parties become more diverse. Hence, risk sharing usually comes about as a collective by-product of national incentives. This political-economic tension can explain why the gains from risk sharing are not more fully exploited, both in the euro area and in the US dollar area. This approach to monetary integration is based on the theory of collective action when hierarchy is not available as a solution to interstate cooperation. The theory originates with Keohane and Ostrom and is applied in this book, taking into account the latest research on the inherent instability of financial market integration. Book jacket.

Contents:

1 Introduction: Understanding the Euro Experiment 1

1.1 The Political-Economic Paradox of Diversity 1

1.1.1 Diversity as Opportunity and as Challenge 4

1.1.2 The Puzzle of Monetary Solidarity 7

1.1.3 Overcoming Collective Action Problems 9

1.2 The Economic Underpinning of Monetary Solidarity 12

1.2.1 Risks to Be Shared in Monetary Integration 13

1.2.2 Risk-Sharing Mechanisms 16

1.2.3 Monetary Solidarity as the Outcome of institutional Evolution 17

1.2.4 The Non-Solution of Mainstream Economic Theory 19

1.3 Overview 22

Part I Building Blocks

2 The Political Economy of Monetary Solidarity 31

2.1 The Puzzle of National Cooperation 32

2.2 The By-Product Theory of Collective Action 37

2.2.1 Origins in the Logic of Collective Action 39

2.2.2 Governing a Commons 42

2.3 Political Market Failures 46

2.3.1 Externalities 47

2.3.2 Asymmetric Information 50

2.3.3 Lack of Commitment 52

2.3.4 Misperception 54

2.4 Forms of Risk Sharing 56

3 Economic Risk Sharing between States 61

3.1 The Idea of Risk Diversification 62

3.2 Sharing the Risk of Output Shocks between States 65

3.2.1 What Are the Main Channels of Risk Sharing between States? 66

3.2.2 How Much Do Various Channels Contribute to Risk Sharing? 71

3.2.3 Does Monetary Integration Lead to More Financial Risk Sharing? 74

3.2.4 What Have We Learnt? 75

3.3 From Channels to Interfaces of Risk Sharing 79

3.3.1 Negative Feedback Loops 81

3.3.2 Fiscal Backstops 82

3.3.3 Monetary-Financial Transmission 83

3.3.4 Variable Fiscal Multipliers 84

3.4 The Limitations of Financial Risk Sharing 84

Appendix 87

Part II Evolving Monetary Unions of Limited Risk Sharing

4 A Short History of Risk Sharing in the US Monetary Union 91

4.1 The Relationship between Monetary and Political Integration 92

4.2 The Emerging Interfaces of Money, Banking, and Federal Public Finances 95

4.2.1 Alexander Hamilton's Plan for Central Risk Pooling 96

4.2.2 Experimenting with Federalism and Free Banking 99

4.2.3 Panicking towards the New Deal 102

4.2.4 The Fiscal Underpinning of the Great Society 108

4.2.5 Deregulation and the Return of Financial Instability 110

4.3 The Political Economy of Monetary Solidarity in the US Dollar Area 112

4.3.1 The Interface of Public Finances and Banking 114

4.3.2 The Interface of Banking and Money 116

4.3.3 The Interface of Money and Public Finances 119

4.3.4 Comparative Political Economy 121

5 The System of Limited Risk Sharing in the Euro Area 125

5.1 Currency Unification against the Odds 125

5.1.1 The Trauma of the 1992-3 Crisis 126

5.1.2 Joining the Risk Pool of a Hard-Currency Area 129

5.2 The Interfaces of Money, Banking, and State Budgets 135

5.2.1 The Set-Up of the Euro Area System 135

5.2.2 Elements of Risk Sharing before 2008 139

5.2.3 Exemptions from Monetary Solidarity 150

5.3 The Political Economy of Monetary Solidarity in the Euro Area 153

6 The Euro Area Crisis as a Stress Test for Monetary Solidarity 158

6.1 The Puzzling Crisis and Its Costly Management 159

6.1.1 Multiple Crises in One 159

6.1.2 Unprecedented Assistance in an Unprecedented Crisis 166

6.2 Explaining the Crisis of the Euro Area 174

6.2.1 Revenge of the Optimum Currency Area? 174

6.2.2 Incompatible Growth Regimes? 179

6.2.3 Incompleteness and Reversal of Risk Sharing? 185

6.3 Monetary Solidarity at Crossroads 196

Appendix: Drivers of Debt Accumulation before and after Troika Programs 197

7 Monetary Solidarity by Default and by Design 199

7.1 Changing Risk-Return Profiles through Integration 200

7.2 Reforms at the Interfaces of Risk Sharing in Response to Crisis 205

7.2.1 Early Interventions to Contain Fiscal Risk Sharing 206

7.2.2 Fiscal Capacity Building and Lending of Last Resort to Sovereigns 210

7.2.3 Banking Union and an Expanded ECB Mandate 217

7.3 Reforming the Governance of the Commons 223

Part III Solidarity in Action

8 Social Solidarity through Labor Market Integration 229

8.1 Labor Mobility in a World of Welfare 230

8.2 The Social Right to Internal Migration in Two Monetary Unions 234

8.2.1 Territorial Access and Welfare Entitlements 235

8.2.2 Dualism in Labor Markets and Risk Sharing 241

8.3 Interstate Risk Sharing through Free Movement in a Monetary Union 251

8.3.1 Sharing the Risk of Economic Fluctuations? 252

8.3.2 Sharing the Risk of Income Divergence? 256

8.4 Free Movement and the Political Economy of Labor Market Integration 261

9 Monetary Solidarity in Financial Integration 266

9.1 The Political Challenge of a Payments System 268

9.2 Payments Systems of Two Monetary Unions 276

9.2.1 Payments Systems in Normal Times 276

9.2.2 Payments Systems in Extraordinary Times 279

9.3 The Beneficiaries of TARGET Insurance 284

9.3.1 Insurance against Sudden Stops of Trade Finance? 286

9.3.2 Insurance but also a Conduit for Capital Flight? 289

9.3.3 Hedging against the Break-Up of the Euro Area? 295

9.4 TARGET and the Political Economy of Insurance 297

10 The Experiment of the Euro 303

10.1 Diversity as Economic Opportunity and Political Challenge 305

10.2 Policy Implications 311

10.2.1 Solidarity and Integration 314

10.2.2 Fiscal Risk Sharing through Reinsurance 316

10.3 European Political Economy 322

10.3.1 Political Legitimation of Monetary Solidarity 323

10.3.2 Reflexive Policy Advice 327.

Notes:

Includes bibliographical references (pages 331-366) and index.

ISBN:

0198717938

9780198717935

OCLC:

960835446