Abstract

It is a convention to say that the Eurozone architecture is ill-constructed and deficient. However, monetary architecture is not a well-defined term in monetary theory, and there is no consensus what the Eurozone architecture is beyond being a metaphor. By combining insights from the research strand of (critical) macro-finance, this study from the Global Economic Governance Initiative at the Global Development Policy Center develops a comprehensive definition of monetary architecture in general and presents an inductive, institutionalist model of the Eurozone architecture in particular.

The model portrays two monetary jurisdictions—the US and the Eurozone—which have a hierarchical relationship. Each monetary jurisdiction is subdivided into four segments of central banks, commercial banks, non-bank financial institutions and a ‘fiscal ecosystem.’ Different institutions are located within these segments, represented as balance sheets. These have a hierarchical relationship with each other as well, and interlock through the instruments they hold as assets and liabilities. This adds up to a fully self-referential credit system. Each institution has its own respective elasticity space for balance sheet expansion that depends on available counter-parties, stipulations for allowed on-balance-sheet activities and available contingent assets and liabilities which are provided by higher-ranking institutions and only become real once a crisis hit. A monetary architecture is thus defined as a historically specific setup of segments, institutions, instruments and elasticity space within a monetary jurisdiction.

The model emphasizes the centrality of the TARGET2 system, shows how offshore US-Dollars are enmeshed in the Eurozone, and rejects the notion that a monetary architecture could ever ‘finished’. It will serve as a starting point for future descriptive and policy-oriented research.

Citation

Murau, S. 2020. “A macro-financial model of the Eurozone architecture embedded in the global offshore US-Dollar system.” Boston University, Global Development Policy Center, Global Economic Governance Initiative, GEGI Study, Boston, MA.

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