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The Political Economy of Monetary Solidarity - Understanding the Euro Experiment (Hardcover)
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The Political Economy of Monetary Solidarity - Understanding the Euro Experiment (Hardcover)
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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 inter-state
cooperation. The theory originates with Keohane and Ostrom (1995)
and it is applied in this book, taking into account the latest
research on the inherent instability of financial market
integration.
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