The Political Economy of Monetary Solidarity: The Euro Area and the U.S. Dollar Area Compared

The political economy of monetary solidarity is a way of looking at monetary-financial integration from a radically different angle than the economic mainstream theory of optimal currency areas. Instead of regarding the diversity of members as a problem, the political economy of monetary solidarity argues that diversity is an opportunity for pooling risks through a common currency that cannot be insured at the member state level. However, risk sharing between states is a public good and its provision therefore beset with collective action problems. This theory expects deliberate risk sharing to come about as a “by-product” of selective incentives by key players, for instance protection of the national export industry against exchange rate instability. The theoretical lens focuses the analysis of a short history of two monetary unions. It finds that both the U.S. federation and the euro area are “incomplete” unions when it comes to sharing risks between members. This incompleteness is not a design flaw but can be explained by the political contestation over solving different collective action problems.