The Political Economy of Monetary Solidarity: Understanding the Euro Experiment

This author-meets-critics panel brings together renowned experts on European political economy and political theory to discuss the forthcoming book by Waltraud Schelkle, The political economy of monetary solidarity: understanding the euro experiment (OUP, April 2017). The 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. Mechanisms of risk-sharing become institutions of monetary solidarity if they are consciously maintained, even when they face opposition in member states. This political-economic tension can explain why the gains from risk-sharing are not more fully exploited. This holds both for the euro area and the US dollar area.  The monetary-financial history of the US reveals striking parallels with the stability problems that characterize the euro area today. There are also contemporary parallels between the two currency unions, including the limited efficacy of migration as a mechanism for regional adjustment and the insurance provided by cross-border payments mechanisms against sudden stops of trade finance. 

The political economy of monetary solidarity is based on the theory of collective action when hierarchy is not available as a solution to inter-state cooperation. Schelkle’s study provides the most systematic challenge to the hegemonic position of the theory of optimal currency areas to date.