Fresh Perspectives on Monetary Union

Oxford University Press has published two new books on the political economy of the euro area that should be required reading.  One, by C. Randall Henning, explains why the International Monetary Fund has become a central actor in the stabilization of the euro area; another, by Waltraud Schelkle, sheds new light on what the single currency has to offer both in its current form and looking to the future.  My reviews of both books are below.

Tangled Governance: International Regime Complexity, the Troika, and the Euro Crisis. By C. Randall Henning. Oxford: Oxford University Press, 2017.

Why did the Europeans involve the International Monetary Fund (IMF) in the bailouts of Greece, Ireland, Portugal, Spain, and Cyprus? Europe is a rich place; the countries needing support share the euro as a common currency and so can draw upon the resources of the European Central Bank (ECB); and Europe boasts a ‘small army’ of macroeconomists, many of whom have worked for the IMF at some point in their careers.

The standard explanations revolve around expertise, credibility, trust, and money. The IMF has long experience working with governments in distress; it has the authority that comes alongside its super senior creditor status; it is less political than the European Commission and less constrained than the ECB; and it has additional resources to lend to distressed countries. While European governments were initially reluctant to involve the IMF in euro area business, they soon recognized the advantages that IMF involvement would bring.

But that is not the whole of the story. According to C. Randall Henning, there was more to IMF involvement than the standard explanations offer. The critical point, Henning argues, is that the presence of the IMF made it easier for Germany to control the bailout process. To understand how, you should think of the governance of international finance as a ‘complex’ of overlapping institutional arrangements. Each of the institutions is the ‘agent’ in a pattern of intergovernmental delegation. The principals in that delegation vary depending upon the identity of the member states and their relative power within the organization.

Within the European Commission, all member states are equally powerful – at least in theory – and so the Commission reflects the interests of both creditor and borrower states. Within the ECB, all member states are equally weak – again, at least in theory – because of the primacy of central bank independence. The balance of forces is more clear-cut in the IMF; large creditor countries like Germany have greater influence. By pushing the IMF into an institutional troika with the Commission and the ECB, the German government can pull the whole complex closer to its national interests.

This is an innovative and interesting argument that Henning supports with an excellent array of case studies. More important, Henning’s argument adds to our understanding of international regimes in a way that resonates with what we know about domestic politics. Politicians seek to ‘entangle’ international, intergovernmental, or supranational institutions for the same reason they strive for a separation of powers in constitutional arrangements. Division creates checks, balances, and veto points that help to prevent an excessive (or unrepresentative) centralization of authority.

The implications of Henning’s argument are significant. If he is right, then integration is a self-limiting process within which states proliferate institutional arrangements as a way to tighten the limits on centralization. This was as true when De Gaulle proposed the Fouchet Plan in the early 1960s as it is in the context of China’s new Asian Infrastructure Investment Bank. Henning’s argument also helps us to understand the potential for international financial governance to descend into gridlock. Although his book went to press before the most recent impasse emerged in the third Greek bailout program, these events would fit easily into his analysis.

Governance across countries is not so different from governance within them. Advanced industrial societies appear to be struggling at both levels of aggregation – particularly, but not exclusively, in Europe. Henning’s work is likely to become required reading among international political economists interested not just in the management of Europe’s recent financial crisis but also the evolution of international economic regimes.


The Political Economy of Monetary Solidarity. By Waltraud Schelkle. Oxford: Oxford University Press, 2017.

A slight change of perspective can make a big difference. Consider the notion of ‘integration’. If you see integration as sharing the same institutions or policies with an ever-widening array of ‘member states’, then it becomes relevant to focus on the implications of a one-size-fits-all approach. The Monnet-Schuman approach to building Europe’s internal market is a good illustration. So is the theory of optimum currency areas. In both cases, participating countries worry about the loss of sovereignty even as common institutions struggle to accommodate increasing diversity. The ongoing crisis of the euro area shows where that kind of thinking can lead – as does Europe’s crisis over immigration and the free movement of labor.

If you see integration as a matter of sharing risks, then the picture becomes very different. The institutions and policies might remain the same, but the implications of diversity – both for the participants and for the group – take on another meaning. It does little good for a country to combine with others like itself because their fortunes are likely to be correlated already. As for the Union, the danger is that will splinter under the weight of a common shock. Diversity is a strength because it ensures that not every participant will suffer at the same time and that their shared institutions will not run out of resources at some critical moment.

Waltraud Schelkle develops this risk-sharing perspective in her fascinating (and very original) analysis of monetary solidarity in the euro area. What she shows is the weakness of standard one-size-fits-all critiques of the euro as a common currency. The founders of the single currency we well aware that the participating countries would be different, one from another. They built on that diversity to strengthen Europe’s zone of monetary stability as an insurance mechanism. And they created other institutional arrangements, like common payments mechanism to link central banks, to deepen and strengthen the pattern of risk sharing. Schelkle’s analysis of the euro area’s real-time gross settlement system (TARGET2) is, by itself, worth the price of this volume. What she reveals is just how well the single currency supported its member states during the crisis.

The politics of risk-sharing is nonetheless very different from the mechanical operation of shared institutional arrangements. While diversity is a strength for any insurance pool, that diversity also sets the limits on how participants can govern shared institutions. Schelkle uses Elinor Ostrom’s work on ‘governing the commons’ to show both the strengths and limitations of emergent political structures like the European Union and the Euro Area. No arrangement is optimal and each implies some sort of trade-off. Hence while it is possible to imagine a perfect design for a single currency (or immigration area), it is necessary to admit that there will be conflicts from the winners and losers that emerge along the way. European monetary solidarity is not a question of making the best of a bad situation; it is a matter of recognizing that no arrangement is perfect, even if some are better than others. By implication, there is no ‘finality’ where Europe exists as a closest possible union. Instead, to achieve the optimal sharing of risks across countries, it is necessary – both economically and politically – to respect the differences among them.


These reviews were both published in the latest issue of Survival.  The manuscript versions are above.  The edited versions can be found here.